For the first time in 2013, investors do not appear to be tripping over themselves to buy every fractional percentage dip. Here on 4/15, the media have blamed the accelerated selling on commodity price depreciation and a disappointing GDP reading (7.7%) out of China.
So we’re supposed to believe that a manic Monday where the domestic markets suffered their worst one-day loss in the year is a direct function of China’s above-goal (7.5%) GDP reading? Granted, China’s failure to come in at a projected 7.9%-8.0% level is a “miss.” On the other hand, the U.S. has been bombarded by bad news for nearly a month, and none of it has mattered to the Teflon rally.
Let’s review a small portion of that sub-par U.S. data:
1. Consumer confidence reached its lowest level in 9 months
2. The International Monetary Fund (IMF) revised 2013 estimates for U.S. growth downward… from an annual GDP forecast of 2.0% to an anemic 1.7%
3. U.S. productivity will decline for its 3rd consecutive quarter — circumstances not duplicated since 1979
4. U.S. employment via labor force participation hit its lowest level since 1979
5. Pre-announced warnings for negative corporate earnings reached their highest level since 2001
Art Hogan, managing Director at Lazard Capital Markets said, “We’ve seen a two-week pattern of less-than-stellar economic data from the U.S., so we seem to be hitting a seasonal soft patch.” I would love to believe that we are merely hitting a soft patch — one that provides ample opportunity for investors to buy into a health-restoring correction. Unfortunately, the global economic slowdown is accompanied by something a bit more sinister: A wave of anti-austerity in Europe that is bumping up against euro-zone bailout requirements.
One month ago, I referred to Europe’s circumstances as having the potential to deteriorate very rapidly. I talked about the impact of destabilization in European banking, insolvency in certain financial institutions as well as a wave of anti-austerity sweeping across Italy, Greece and Portugal. Super-charged central bank stimulus may have propped up U.S. and Japanese stocks over the last 6 months, but the euro-zone has not been able to shake off the specter of debt contagion.
Where does this leave the investor? Sell in May and go away? Sell on tax day and go outside to play?
You do not need to sell everything in your portfolio. In fact, you can use trendline breaches or stop-limit loss orders to make unemotional sell decisions. Still, one’s 2nd quarter portfolio should tilt defensive. (Note: Here is an example of an ETF portfolio with less volatility and less risk.)
I do not believe in momentum investing alone. That said, there are a number of fundamental and economic trends worthy of recognition if for no other reason that those trends are beginning to show up in the technical charts as well. There’s a trend toward slower economic growth clear across the globe (America included) and there’s only so much that the central banks can do about it. There’s a trend toward weaker corporate earnings and there’s only so much corporations can do in lieu of a hiring spree. There’s a trend toward holding a tough stance on bailouts by euro-zone authorities and there’s only so much that anti-austerity anger can do about it.
The following table depicts month-long weakness in cyclicals and international equities. Meanwhile, bonds are bouncing back and non-cyclical stocks are carrying the torch for the Dow and the S&P 500.
|Month-Over-Month Data Confirms Relative Strengths and Weaknesses|
|1 Mon %|
|iShares 20+ Treasury (TLT)||6.9%|
|Vanguard Long-Term Government Bond (VGLT)||5.9%|
|SPDR Select Sector Utilities (XLU)||5.2%|
|Vanguard Telecom (VOX)||5.2%|
|SDPR Select Sector Health Care (XLV)||5.0%|
|SPDR Select Consumer Staples (XLP)||3.6%|
|WisdomTree Equity Income (DHS)||2.3%|
|iShares MSCI Emerging Markets (EEM)||-5.4%|
|SPDR Select Transportation (XTN)||-5.4%|
|iShares MSCI Italy (EWI)||-5.6%|
|SPDR Select Sector Energy (XLE)||-6.0%|
|SPDR Select Basic Materials (XLB)||-6.3%|
|iShares MSCI Spain (EWP)||-7.6%|
|iShares DJ Home Construction (ITB)||-8.0%|