April 27, 2016

April 27th, 2016

Markets – Sell in May and go away?”

It’s that time of the year when we hear a lot about whether it’s appropriate to “sell in May and go away.” Since 1950, nearly all of the S&P 500’s gains have occurred between October and the following April. The corresponding average during May through October was 1.3%; while for November through April it was 7.1%.

However, the “strategy” did not work for the three years from 2012-2014, or for the five years from 2003-2007, when there were gains between May and October in each year.

Bottom line – maintain your strategic equity allocation. For those working, continue your monthly investments in your retirement accounts.

Social Security

Social Security provides only a portion of what most people need to live comfortably in retirement. In fact, the greater one’s income during his or her working years, the less he or she will receive proportionately in Social Security retirement benefits. The Social Security Administration advises that, for average American consumers, more than half of their retirement income must derive from personal savings and investments.

Inflation

Inflation can be a real problem to those who live on a fixed income. Even a moderate increase in the cost of living will have a significant impact over a retirement period that can extend 20 to 30 years or longer.

MI TWC Table

 

 

 

 

 

 

 

The Markets Last Week

The U.S. stock market finished higher last week, coming within a whisker of all-time highs but failing to push through. Trading was active and U.S. economic data was mixed.

Worse-than-expected earnings from tech stocks like Microsoft (ticker: MSFT) and Alphabet (GOOGL), parent of Google, pushed down the tech sector, which fell 2% Friday.

The Dow Jones Industrial Average gained 106 points or 0.6%, to 18,003.75. The Standard & Poor’s 500 index advanced 11  to 2091.58. The S&P 500 hit 2111 intraday Wednesday, less than 1% below the 2131 record of last May. Tech-stock weakness hit the Nasdaq, which fell 0.7% to 4906.23. The Russell 2000 jumped 1.4% to 1146.69.

Last week’s volatility and failure to punch through the old high reflects an “internal debate on the Street on whether the market is overvalued or fairly valued,” says Malcolm Polley, president of Stewart Capital Advisors. Undervalued it’s not, he adds.

With a market price/earnings ratio of 17 times, “you can make the case that if profit margins hold up, profits grow, and rates don’t go up, the market is adequately valued,” he adds. Only higher earnings and stable rates will get it higher, he adds, but rates are going up, and the market’s seasonally weak summer season is coming up.

We agree with Polley’s view, but it must be noted that market breadth—the number of stocks advancing versus those declining—and other underlying factors are as bullish as they’ve been since a year ago.

Also, as James Paulsen, chief investment strategist for Wells Fargo Capital Management, points out, defensive stocks have been giving way. The focus has been on new highs, but the leadership change is important as an indicator that the market could soon make another try for a new high.

Last week utilities, staples, and telecom stocks fell. Those were the best performers in the first quarter but are so far the worst in the second. Other bullish signs include the trend of small caps, cyclicals, and multinationals beating, respectively, large caps, defensive, and domestic stocks.

Part of the market-valuation debate is influenced by the earnings reports. On that front, “there isn’t much clarity,” yet, says J.J. Kinahan, chief strategist for TD Ameritrade. For the multinationals it was a mixed picture, he adds, with McDonald’s (MCD), Caterpillar (CAT), and IBM (IBM) showing weakness overseas. It suggests consumers outside the U.S. are doing less well than reports indicate, he adds.

On Wednesday the Federal Reserve Open Market Committee meeting ends, but no rate changes are expected. The U.S. first quarter GDP number will be released Thursday. That also marks the day when the bull market that began in March 2009 will become the second-longest in history, at 2607 days, topped only by the technology bull of October 1990 to March 2000 (Source: Barron’s Online).

The Numbers

Returns through 4-22-2016 1-week Y-T-D 1-Year 3-Years 5-Years 10-Years
Bonds- BarCap  Aggregate Index     -.4   3.0    1.9     2.2     3.6     4.9
US Stocks-Standard & Poor’s 500      .5   3.0    1.4   12.6   11.7     7.0
Foreign Stocks- MS EAFE Developed Countries    1.3     .2   -8.4     3.3     2.3     1.7

Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized excluding dividends.

Motivational Quote of the Week

“The question isn’t who is going to let me; it’s who is going to stop me.”  – Ayn Rand


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