"Acquire Riches by Industry and Frugality." -Ben Franklin
Selling newspapers, etc: Reading articles about the markets and watching the news, whether it be CNBC or Bloomberg or your personal favorite, can be very exhausting. The reason of course is all the hype... but that's a necessity, if it wasn't exciting when you turned on the news or read the latest headline then you, me and everyone else, just wouldn't pay any attention. I had the pleasure of meeting the CFO of one of the largest mutual fund companies in the world, who will remain nameless to avoid conflict, and the only thing he said to me that really stuck was, "Whenever you see me on TV hit the mute button!" He clarified that the reason they (networks/media) put him on TV was to gain viewers and that he was VERY confined to what "truths" he could actually speak. So much so that he said honestly we would be better off not listening at all.
So whether the markets are rising or falling we are bound to hear opinions expressing that markets are headed in both directions at the same time from different "professionals" in all genres of the world of finance. Knowing what to believe or how to figure out who is more right is, in my opinion, the dutiful job of a modern-day investor. That, along with doing all your homework on the investment vehicle you are considering: risk vs. reward, fundamentals, technicals, etc. The following is more information and analysis of a bit of the past, present and future of our markets.
Sell In May: Most savvy investors have heard the often mentioned seasonal phrase, "Sell in May and go away." A quick explanation from 'Investopedia':
This strategy is based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April. According to the Stock Trader's Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.
Okay, so if we're long-term investors, according to the average returns over the past 60+ years, we might do well to sell in May and return to our positions in November. But what if I didn't, which, I didn't! What now?
Balance: From all available evidence, the markets have continued bullishly forward for most of this year as a result of a fine balance that has remained relatively intact since the beginning of the year. The balance is between: what the Fed does, and therefore where interest rates are; how individual companies are performing, especially how their quarterly reports look and whether or not they beat the "Street's" expectations; what the economic numbers of our own country are: CPI (inflation indicator), unemployment, GDP, politics of taxation and regulation, etc; what is happening on the other side of the pond: politics of foreign countries and their economic states.
So that was quite a list of factors, to even consider that they might somehow all achieve a certain balance takes a bit of fortitude. But look at the charts, we have been going up, regardless of the seemingly endless chain of headlines calling for a market correction in the neighborhood of 10-15%. Here is a 1-year chart of SPY to give a little clarity:
True, it's not a straight line, but certainly a strong rising machine. Those who have tried to get in the way of this bull market by shorting it this year have mostly been left in the dust.
The correction that we just saw from May 21-June 5 resulted in a 3.61% drop in the S&P 500. Is that the healthy move this bull market required to digest those large prices and keep striving for even higher ones? To answer that let's take a closer look at the variables which make up the so-called balance mentioned above.
Our Markets: The Fed is forced to keep interest rates low as long as our economy remains in critical condition. For now (seemingly at least through 2014), the Fed has promised to continue to be expansionary, keeping rates low and money easy, because although the market has done quite well since the crash in 2008, unemployment is still not OK. If we are at risk with unemployment, then we are still at risk of further housing foreclosures, and if that's the case then to put it way too simply, we are at risk of experiencing the same crisis we felt beginning in 2007 and resulting in the upset of 2008.
Individual companies, not all of them, but a majority, are outperforming Wall Street's expectations. That is possible because most of them were forced to be austere, trim the fat of extra costs and labor, in order to survive. Those measures have been extremely lucrative and because the political atmosphere has been one of uncertainty pertaining to future taxation and regulation, they have for the most part refused to take a chance on new hiring or large expansions. So the end result is a market full of companies with lower operating costs and higher profit margins who are hoarding cash in patient anticipation of a time when it will be safe to take on more operating burden to expand their businesses.
Foreign Markets: The major players on the other side of the pond, Europe and Asia, have their own unique ways of battling off total depression and we will not get into depth as to their specific challenges or solutions for those challenges in this article. It is only necessary to know how their state of affairs fits into our balance. The U.S. is such a strong force in the world markets that we normally pave the way for the other markets, or in other words, world markets often follow our moves up and down (this is not all markets every day but a general sense of the greater movements). So in order for the tables to turn, for a foreign market to weigh on ours, it often takes a strong catalyst, a large event like an entire country going bankrupt or a war erupting. And though Europe has seen its fair share of near-cataclysmic events in several countries: Greece, Italy, Spain, Portugal..., they have, with many varied efforts, managed (for now) to keep from going completely belly-up.
Asia is of course night and day compared to ourselves or Europe in regard to their policies and how they deal with their own problems or ours for that matter. Though, again, regardless of the different approaches they take, they too, for the time being, have been able to stave off disaster. As long as Europe and Asia can continue their efforts in their current direction they should not interfere with our bullish outlook and will actually only help us to thrive.
Too Rosy? So far this appears to be a pretty rosy look at where we are from where we've been. So where are we going from here? In taking another technical look at SPY over the last 365 days my analysis is that it has been choppy but incredibly bullish with adequate corrections to allow for further growth. I think most investors would agree whether they were hoping for that or not. From June 8, 2012 - June 7, 2013, SPY has gained 23.81%. That is an average of 1.98%/month for the last 12 months! If we extrapolated that with the expectation that we would continue in exactly the same fashion as we have for the last year we would end up with another gain of approximately 13.5% for the remaining 6+ months of this year... hmm... sounds too good to be true or possible. But we have to bring ourselves back to February, March, April, and May, when, throughout these months, countless articles and 'talking heads' came out saying that this market cannot continue as it has, and that we are due for a correction!
Well, we did have 'corrections,' but nothing catastrophic, in fact they were more what I would call quite healthy, or 'good buying opportunities.' If you found yourself to be afraid of an imminent, doomsday-type correction, then you probably kept your money off the table and missed this amazing market. If that's the case, you were not alone. Plenty of fund managers, the ones managing hundreds of millions of dollars, also thought they needed to stay in cash, bonds, or gold. This is one reason I believe we have continued to rally. If you were them, and you missed a nice 3% move in a month, would you want to say that you were wrong, that you hadn't taken part? No. So come close to the end of each quarter we have seen consistent inflows of capital into the equity markets, a large part most likely from those who missed the boat, so that they can 'say' that they were involved, that they had a piece of the action, whether their timing was perfect or exactly the opposite. My theory here is backed by a higher average volume starting 2 weeks before the end of each of the last 2 quarters, ending Dec 31 and March 31.
Close of 2013: For the remainder of the year I see 2 distinct possibilities. The first is that we continue in the direction we've been heading, the bull market prevails, and we do see another 13.5% gain in SPY and therefore at least a 10% gain in the Dow, S&P 500, and the Nasdaq. This is the scenario I'm currently betting on in most positions. The end result of a year like that would be one of the best years the markets have ever seen. That's probably why many talking heads are throwing themselves out there against this possibility, the odds are against it. It does not happen very often. The best one year performance for the S&P 500 was in 1954 when it was up 45.02%. If everything goes perfectly here with the average 1.98% gain/month, we would end up with a 29.22% gain in SPY for the entire year of 2013, which would sit as one of the top 10 best annual returns in the past 60 years.
Scenario #2: The second scenario would be that the naysayers finally get their day and we see a large correction, somewhere in the 10-15% range. This correction would most likely be a result of a number of factors colliding to throw off the current balance. For instance: a bad series of quarterly reports from several companies coupled with poor unemployment numbers... or.... Israel attacks such and such, who then decides to retaliate for real, that could easily knock us off the tightrope.
Conclusion: Don't get me wrong, I know my outlook is optimistic. I am all too aware of the fragile balance we find ourselves in. I think it's nearly a miracle that the market has rallied as far as it has, but the present signs are telling me that there's a very good chance that we will keep on running right past all expectations, leaving the short sellers and cash hoarders dreaming of a time when they made the right choice. We're in uncharted territory, near the top of all of our markets and there really are only 2 directions to go, because our markets are just too volatile to stand still!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.