Think Twice Before Moving to the Sidelines

Richard E. Haskell, Sr.


April 1, 2010 Edition, Volume IV

Inside Signature Update

• The Market – Investors: Think Twice Before Moving to the Sidelines

• The Economy – Spring Economic Potpourri

• The Takeaway – Just What Were They Thinking?


THE MARKET – Investors Should Think Twice Before Moving to the Sidelines

Over the past few weeks we’ve experienced too many trading sessions where the DOW has climbed to double and triple digit gains before settling in with only modest improvement on the day. In some markets, this sort of activity is a sign the market is topping out and a correction is likely to follow. In others, it’s simply a response to other economic activity, news events or political issues. Regardless, it’s something to pay attention to.

A market correction of 5-10% is often the precursor to a rally sufficient to take the market to new heights; such as the correction and ensuing rally we experienced earlier this winter. The DOW closed at over 10,700 in mid January before pulling back to just above 9,900 in early February; the index closed Tuesday (3/30/2010) at over 10,900 and appears to be headed towards 11,000 or higher. In this case, the correction led to a healthy rally that has the markets at near-term highs. Investors pay little attention to corrections and rarely attempt to participate in the type of activity traders employ in an effort to exploit market dynamics. Barring unexpected political events or natural disasters, our expectation is that the DOW will continue to climb through the 11,000 level and close out 2010 well above current levels – perhaps 1,000 points higher than Tuesday’s close.

Most of us are familiar with the adage “Sell in May and go away”; it’s an old stock market saying, suggesting that investors should sell out of their portfolio’s in May, presumably after a Spring rally, and then buy back into the market in the latter part of the Summer or Fall, after an expected decline in market values. More often than not this strategy yields higher returns than investors might have experienced had they simply maintained a particular position in a given stock, but it’s highly dependant on when you sell, when you buy back in and whether or not you have the discipline to follow the markets movements.

In truth, it’s not a strategy most investors should employ unless they’re prepared to monitor the markets closely or have an advisor with whom they’re closely aligned and who utilizes tactical trading models. Such activity certainly has its risks and even savvy investors should carefully weigh them against the possible rewards. Traders, on the other hand, love the concept. Not only does it give them the potential for greater gains, but it lets them focus on other activities for the summer.

The “Sell in May” strategy has its roots in our nation’s agricultural history. From the 17th to mid-20th centuries, those institutions prepared to lend capital to farmers typically did so in time for them to purchase seed before the spring planting season. They would often sell other investments to raise the cash to do so, and in the fall, after the crops were harvested and farmers repaid their short-term loans plus profits and interest, these same institutions would put their resources back into the markets for the winter.

The act of liquidating investments to raise cash would put downward pressure on market values and by the end of May markets often began to show declines. When funds would then be reinvested in the fall, including profits, market values would increase due to the net capital inflows. Even though today’s markets aren’t subject to the same forces they were when the US was principally an agrarian economy, some still rely on the same market cycle to govern their holdings. It’s an out-dated strategy that becomes less statistically meaningful with every passing year.

Most investors aren’t prepared to do this of course, but for those that are the statistics are only sometimes in their favor. There are years, like 2009, when this strategy would have been very costly. In the July 2, 2009 issue of Signature Update we discussed the problem of selling off a portfolio in the face in of a recovering market. The DOW closed at just over 8,600 at the end of May 2009 and opened October 1st at over 9,700 – those employing the “Sell in May” strategy could have left 1,100 points of profit on the table. On the other hand, employing the strategy over the same time frame in 2008 might have saved investors as much as 1,700 points on the DOW. Obviously, 2009 was a recovery year for the markets while 2008 saw painful losses overall.

What about in other market years more similar to 2010? The data offers a mixed bag, with far too many variables to develop a reliable regression model. What is clear is that the forces that helped coin the term, “Sell in May and walk away” were more dominate in decades and centuries past than they are in our current economic era. Our markets and economy are still in recovery mode and will be for several years to come. We continue to assert that even though we’ll experience short-term market corrections, perhaps a few more times this year, the markets have a long way to go before topping out and becoming overvalued. P/E ratios on large caps are comparatively low, earnings remain robust, dividends are increasing, and the Treasury Yield Curve remains steep. This is a time of opportunity and growth and certainly not a time to “walk away” or move to the sidelines.



THE ECONOMY – Spring Economic Potpourri

The Consumer Confidence Board released the March Consumer Confidence Index this morning, reflecting a stark improvement over last month’s figure. The March CCI came in at 52.5, up from 46.4 in February and represented the fourth month out of five that the index reflected consumer’s improving attitudes. Details inside of the numbers tell an important story as well. In February, 45.1% of respondents described the economy as “bad” while only 42.8% offered the same analysis in March.

The March survey showed that 8.6% of those polled feel the economy is “good”; up from 6.8% last month. Not surprisingly, consumer spending offered a sufficient increase in March to yield a 1st quarter gain of 3.8%, adding to the 4.2% improvement in the 4th quarter 2009.

The factors most likely driving the improvement are the labor markets, stock market gains and Spring. Better weather and rising stock market values are always welcome signs and provide a meaningful improvement in consumer confidence levels, especially this year as we’ve recently passed the one year anniversary of the market lows that followed the economic crisis and resultant recession.

Analyst expectations for March job gains, to be reported at the end of the week, run as high as 200,000 for the month. The ADP report released this week shows a decline in private, non-farm, non-seasonally adjusted jobs of 23,000. At the same time, the Department of Labor reported initial jobless claims fell by 6,000. The difference between the reports and analyst expectations can be seen in government jobs, including those offered by the BLS (Bureau of Labor Statistics) for the 2010 Census. By May 2010, the 2010 Census effort will require as many as 800,000 part-time, temporary workers in addition to those full-time workers already hired. These numbers aren’t likely to have any significant impact on the BLS’s unemployment statistics due to their seasonal and part-time attributes, but may contribute as much as ¼% to 2nd Quarter GDP.

Newspapers reported a February increase of 13.1% in employment related classified ads and internet based classifieds rose by 19.6%. The results won’t drive the unemployment figure down as much as we might hope, but for those households in which workers returned to the ranks of the employed, the recession is finally over.

Inflation remained moderate in the face of a March personal income increase of .7%. The personal consumption expenditure price index (PCE) year-over-year gain fell to 2.1% versus 2.4% reported in February. Though “Inflation Hawks” and “Gold Bugs” continue to make sound inflation alarms, there simply isn’t anything on the horizon to support their fears.

The 1st Quarter 2010 ISM Report (Institute for Supply Management) reflected continued growth in the overall economy for the 11th straight month, with the manufacturing sector having gained for in each of the last 8 months. Notably, for the first time in 46 months inventories edged up slightly.

THE TAKEAWAY – Just What Were They Thinking?

• The US economy is continuing to rebound at a strong pace. Though the 5.6% GDP gains of the 4th Quarter 2009 may not be repeated for 2010 as a whole, overall gains will be respectable and are likely to exceed 3 ½ to 4%

• Look for gains in Large Cap stocks as earnings reports and dividend increases are announced over the next few weeks.

• In the aftermath of the recent passage of important healthcare legislation, reports have continued to come forward over the “sweetheart” deals the Obama Administration and House Leadership made to insure the bill’s passage. Added to the constitutional challenge filed by thirteen State’s Attorneys General in the United States District Court in Pensacola, Florida the reports have already began to undermine the legislative effort and call into question whether or not the bill, already signed into law, will have any meaningful impact.

• That the US wants and needs a plan to deal with our growing healthcare issues is no longer in question; that our citizens, legal system and constitution are ready to accept a bill passed “at any cost”, is not only questionable, but mounting evidence is already showing large scale dissatisfaction.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC