There’s an old saying among stock investors that says to invest “November to May then go away.” Traditionally, the return on stocks between November and April is significantly higher than returns in May through October. Obviously not everyone follows this advice - if everyone tried to take advantage of this then it wouldn’t work. And like all predictors of stock prices, the November-to-May system is wrong on enough occasions to dissuade people from going “all in” each and every year.
Having said that, I firmly believe that May, 2011 is the perfect time to “go away” from the stock market for several months. Here are some reasons why:
- The Federal Reserve’s QE2 program officially concludes at the end of June, 2011. The economy, while anything but robust, is showing enough signs of life that the Fed is very unlikely to extend Quantitative Easing into a third phase. The end of QE is going to have significant effect on interest rates (going higher) since the Fed will not be buying up Treasuries like drunken sailors. Instead real buyers, like China, will have to take up the slack and those buyers are not showing a lot of confidence in Uncle Sam these days.
- The stock market is overbought right now. Sorry, I don’t care if the historical PE isn’t quite at bubble level yet and that corporate earnings are strong. The US economy is not as strong as many people would like to think – just look at unemployment and the housing market as exhibits A and B. Current corporate profits have been made by two years of cost cutting – now companies are going to have to rely on top line growth and that isn’t going to happen with $4 gas prices.
- The strong market we’ve had can’t continue. Look at all the bad news that the market has virtually ignored while it soared to the best performance in March since 1998. Japan, the economic issues that continue to mount in Europe, the fact that Uncle Sam hasn’t the willpower to cut spending or raise taxes, and the unrest in the Middle East. A market that soars contrary to horrible things going on all around it is heading for a fall.
- The Federal Reserve’s QE2 program officially concludes at the end of June, 2011. The economy, while anything but robust, is showing enough signs of life that the Fed is very unlikely to extend Quantitative Easing into a third phase. The end of QE is going to have significant effect on interest rates (going higher) since the Fed will not be buying up Treasuries like drunken sailors. Instead real buyers, like China, will have to take up the slack and those buyers are not showing a lot of confidence in Uncle Sam these days.
- The stock market is overbought right now. Sorry, I don’t care if the historical PE isn’t quite at bubble level yet and that corporate earnings are strong. The US economy is not as strong as many people would like to think – just look at unemployment and the housing market as exhibits A and B. Current corporate profits have been made by two years of cost cutting – now companies are going to have to rely on top line growth and that isn’t going to happen with $4 gas prices.
- The strong market we’ve had can’t continue. Look at all the bad news that the market has virtually ignored while it soared to the best performance in March since 1998. Japan, the economic issues that continue to mount in Europe, the fact that Uncle Sam hasn’t the willpower to cut spending or raise taxes, and the unrest in the Middle East. A market that soars contrary to horrible things going on all around it is heading for a fall.
As with any other financial advice, you should take whatever I say for what you think it’s worth. But all evidence is pointing toward a correction – perhaps a really big one – around late spring to mid-summer.
If stocks aren’t a good investment for the next 6 months, what is? Look for the next blog.
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