|
In talking with my old friend, investor and world traveler Jim Rogers during last week's broadcast, he mentioned the Wall Street saying, "Sell in May and go away", and it had me wondering if it will prove true again. I have my doubts.
Historical data shows that the adage has some basis in truth, but that was then and this is now. I don't have that much confidence in my market-timing abilities and prefer to remain invested for the long term, using weakness to buy assets that fit into my overall lifestyle and investment plan. But the stock market is made up of human beings that do very predictable things in response to familiar stimuli. If a pattern has been perceived to exist, humans will follow that pattern in the absence of any earth shaking news and/or events.
I wrote last summer that U.S. stock markets generally rise from November through April, and fall from May to October. For example, the Dow Jones Industrial Average in the May-October period fell 11 out of the past 17 years.
The last six months fit that historical pattern, but I'm not so sure we're going to see a sell-off in the summer. I'm seeing something different emerging, and this year may be the exception that proves the rule for a variety of reasons.
First, the tax cut recently passed by Congress. The legislation cuts income tax rates, putting more money in the paychecks of workers - a good thing. It also expands an existing tax break for business investment - potentially a good thing. It will temporarily reduce taxes on investment dividends while lowering capital gains taxes - a double edged sword if it encourages massive stock sales to offset losses accumulated over the past three years.
What will investors do with the benefits of this legislation? It's no secret that this country, its corporations and individuals are deeply in debt: Just look at the record number of personal bankruptcies filed this year. Will consumers pay down debt or continue to buy, buy, and buy?
Business investment has been lagging due to uncertainty, as some point out, or overcapacity as others suggest. It certainly hasn't been stifled by high interest rates: The Federal Reserve's accomodating stance has pushed interest rates to levels not seen since Eisenhower was in the White House. Will this tax cut be the incentive to get business spending up and running again? Maybe corporations would have made new investments without help from Washington, but it certainly gives the possibility new impetus, especially since the technology that created great productivity gains is becoming obsolete.
Second, we're approaching the start of election-year campaigning. Incumbents will do whatever is necessary to get the economy pumping hard, thereby ensuring their job security. Now that the war with Iraq is officially over, it will be hard to avoid Main Street issues - the economy, healthcare and national security - and that means spending money, not cutting services.
Finally, investors and therefore the Fed, seem to be preoccupied lately with fear of deflation -- that is, falling prices caused by a decrease in the amount of money in circulation or by a decrease in the total volume of spending. Deflation hurts the economy because it hurts corporate profits and, in an effort to offset those lower prices and profits, corporations lay off workers. And because prices are spiraling downward in a deflationary economy, consumers put off major purchases because they expect even better bargains, thus exacerbating an already bad situation.
But do you really think the powers that be will let deflation take hold in this country? Jim Rogers quoted a Fed governor who basically said anyone who thinks we'll see deflation in the United States doesn't understand the modern printing press. The Fed has said it will buy whatever is needed to keep prices up; that could include buying the dollar, or even stocks. The Fed has been suspected - or is it accused? -- of doing that before, so why not now?
I may be wrong about our ability to break the historical trend. After all, patterns sometimes happen for a reason. But buying stocks now, with sell stops beneath the October lows (or the March lows for the really faint at heart), seems much less risky to me than than selling and trying to reinvest later in the year.
|
