Markets down in May, The Same but Different

As you’ve probably heard by now from the major media outlets, May was the worst May for US stocks since 1962.  Lets take a closer look at the two “May” months.

The same, but different: In the 1962 bear market, the S&P 500 fell nearly 30%. At the time, market attitude was dragged down by the botched Bay of Pigs invasion and the Cuban Missile Crisis, but the fundamental environment remained (solid GDP growth). To some extent, we believe the current environment is similar, given that stock prices are being driven much more by emotion than by fundamentals today.

The same but different too: In previous business cycles, the economy experiences brief slowdowns, but not recessions, on the way back up. If that is also the case today, then what we are looking at should be a brief slowdown in growth, but not a double-dip recession.

The Concerns: The uncertainty in Europe.

Can they solve the problem with a fiscal bail-out & belt-tightening?

Or will they be torn apart?

Investors are questioning whether Greece & the rest of Europe will be stern enough for the markets to regain confidence.

The Opportunities:

• US economy continues to show slow signs of improvement
• First-quarter GDP growth was 3.0%
• Consumer confidence readings rose in May
• The labor market also so signed of improvement in May
• Positive Earnings reports & expectations have risen

Scenarios: The main issue currently troubling investors is the degree to which fundamental uncertainty has inflicted damage on the economic recovery.

• The most “pessimistic” view is that we are witnessing the beginning of a movement that will lead to a global “double dip.”
• The most “optimistic” outlook is that what we are seeing is no more than unnecessary panic, which will be quickly overwhelmed by fundamental strength.

The truth probably lies some where in the middle; but we favor the “optimistic” outlook. 

Conclusion:  By recent market activity, investors seem to be moving to a wait-and-see approach (up from “panic”), and while we do reason that fundamental strength will prevail, we recognize that it may take some time.

Our best estimate at present is that nervous markets and uncertainty levels will keep market volatility higher over the summer months. However, should the labor market recovery continue, as we expect it will, the backdrop of strengthening corporate profits and a recovering economy should push equity prices higher, although it will take some patience to get there. We appreciate your trust and are only a phone call away to discuss your situation in more detail.