By Panos Mourdoukoutas
The beginning of the month is usually positive for Wall Street, as new money from pension funds and automatic savings plans flow into stocks, especially as the world economy recovered from the subprime crisis of 2009. In the last two months, however, this pattern seems to be broken down, as Wall Street sold off both in the beginning of May and in the beginning of June. Is this just a seasonal correction, consistent with the old adage, "sell in May and go away," or a cyclical correction?
Declines in both months were broad, spreading to both, cyclical industries, the likes Caterpillar (CAT), General Electric (GE), and Walter Industries (WLT), and to nocyclical industries, the likes of Pfizer (PFE), Merck (MRK), and Novartis (NVS), which confirms a seasonal correction. Cyclical sectors, however, suffered more than noncyclical sectors. In the first week of June, for instance, the consumer discretionary sector lost 3.2 percent, materials 3.2, and industrials 3.1. Caterpillar and Walter Industries lost close to 10 percent of their value over the last two months, Freeport McMoRan (FCX) 12 percent, Ford (F) and General Motors (GM), Silver ETF (SLV) lost close to 35 percent of its value, and only the gold ETF (GLD) maintained its value, thanks to ongoing geopolitical events. This means that a cyclical correction is underway, accelerating and magnifying the seasonal correction.
The cyclical correction is supported and re-enforced by a host of macroeconomic indicators published in the early days of both months that confirm a worldwide slow-down. In the last quarter, the U.S. economy grew by an anemic growth of 1.8 percent, unemployment continues to hover around 9 percent, housing is taking another dip, and manufacturing is cooling off; Japan GDP slid anew into negative territory; China's growth de-accelerated; and Germany and France are the two growing economies of Europe.
What worries Wall Street the most, however, is that U.S. growth has been propelled by QE that is about to end; and soaring government deficits that must be soon addressed by some sort of austerity. China's growth has been propelled by exports to the U.S., and by a reckless expansion of credit that has been blowing bubbles in all directions. Germany's and France's growth has been propelled by exports to the U.S. and by keeping periphery EU states afloat. But how long can it continue? Investors may be wise to take a closer look at strategies that have been routinely following in the last two years, especially since the launch of QE2 last August.