Clichés can offer us a little comfort
Clichés can offer us a little comfort
By John Authers in New York
Published: July 14 2006 19:50 | Last updated: July 14 2006 19:50
Copyright The Financial Times Limited 2006
Sometimes unscientific market clichés turn out to have their uses. This year, “Sell in May and go away” would have been a great strategy.
When to re-enter the stock market, however, is harder to call. In the UK, the line ends with “Come back on St Leger Day” in early September. Folk wisdom in Wall Street is that May begins a six-month period of stock market doldrums, with November being the time to re-enter. At present, the uncertainty hitting the markets, as well as the global economy, make both of those possible re-entry points look optimistic.
“Sell short in May” would have worked even better than “Sell in May”. As winter became spring, Wall Street appeared to be confidently on course for new highs. The S&P 500 was up more than 6 per cent for the year in early May, while the Dow Jones Industrial Average was up more than 5 per cent.
The Nasdaq started at an even faster pace, gaining 7 per cent by the beginning of May, while the Russell 2000 index of smaller companies peaked with a gain of 16 per cent.
Since then, the falls in all of these indices have been precipitous, although the S&P and the Dow are yet to suffer the 10 per cent drop needed for an official “correction”. The Nasdaq was down about 14 per cent from its peak during trading on Friday morning, while the Russell has given up 12 per cent.
What caused the turnround? All the theories revolve around the US economy and the interplay of inflation, growth, and the Federal Reserve’s monetary policy. It was in May that the markets suddenly got the message that inflation may indeed be too high, as the Fed had been warning, and hence that the Fed may continue raising base lending rates beyond 5 per cent, which it has indeed subsequently done.
One school of thought is that the market took fright at an impending liquidity crunch, delivered through higher rates. Another is that the fear was of inflation, and another is that traders were worried by the prospect for a decline in economic growth following an “overshoot” by the Fed. At least it was clear that the market feared that the “Goldilocks Economy” – where growth would continue but more slowly, and without provoking inflation – was not going to happen.
There was a more obvious trigger for the renewed selling of the past week. The sharp ratcheting up of global uncertainty has fed through into share prices, both through the rising oil price – which could damage companies reliant on consumers’ discretionary expenditure – and through a heightened nervousness that reveals itself in a readiness to take almost anything as a cue to sell.
The Vix contract – which measures volatility from the behaviour of options on the S&P 500 – rose 32 per cent this week. Several earnings announcements from companies produced savage responses. The tech sector, in particular, saw selling even when companies had said nothing, as investors braced for the worst.
So, having sold in May and gone away, when should investors return? Both St Leger Day and the Americans’ favoured re-entry date on Halloween look over-optimistic at present.
Look at it this way: how soon can we reasonably expect the various uncertainties to be resolved? On the corporate front, we should at least know the worst in another couple of weeks – and the consensus expectation is still for a rise of more than 13 per cent in the profits of S&P 500 companies.
But there is not a glimmer of the kind of news event that could emphatically bring an end to the market’s political worries, either over Iraq, or Iran, or Israel. These are complicated situations, and it will take a while to instil calm.
And on the Fed, it is also difficult to see how swiftly uncertainty can be resolved. Even if there is no rate rise next month (which would certainly be quite a fillip for the market), uncertainty over whether this was merely a “pause” would probably persist for the next two meetings after that. There is a continuing drip of economists raising their forecasts for the high point of the Fed funds rate, which many now believe could reach 6 per cent (it is currently at 5.25 per cent).
In the circumstances, with an inflexion point in monetary policy coinciding with a relatively new Fed governor, the one certainty appears to be more uncertainty from here to the end of the year.
john.authers@ft.com
By John Authers in New York
Published: July 14 2006 19:50 | Last updated: July 14 2006 19:50
Copyright The Financial Times Limited 2006
Sometimes unscientific market clichés turn out to have their uses. This year, “Sell in May and go away” would have been a great strategy.
When to re-enter the stock market, however, is harder to call. In the UK, the line ends with “Come back on St Leger Day” in early September. Folk wisdom in Wall Street is that May begins a six-month period of stock market doldrums, with November being the time to re-enter. At present, the uncertainty hitting the markets, as well as the global economy, make both of those possible re-entry points look optimistic.
“Sell short in May” would have worked even better than “Sell in May”. As winter became spring, Wall Street appeared to be confidently on course for new highs. The S&P 500 was up more than 6 per cent for the year in early May, while the Dow Jones Industrial Average was up more than 5 per cent.
The Nasdaq started at an even faster pace, gaining 7 per cent by the beginning of May, while the Russell 2000 index of smaller companies peaked with a gain of 16 per cent.
Since then, the falls in all of these indices have been precipitous, although the S&P and the Dow are yet to suffer the 10 per cent drop needed for an official “correction”. The Nasdaq was down about 14 per cent from its peak during trading on Friday morning, while the Russell has given up 12 per cent.
What caused the turnround? All the theories revolve around the US economy and the interplay of inflation, growth, and the Federal Reserve’s monetary policy. It was in May that the markets suddenly got the message that inflation may indeed be too high, as the Fed had been warning, and hence that the Fed may continue raising base lending rates beyond 5 per cent, which it has indeed subsequently done.
One school of thought is that the market took fright at an impending liquidity crunch, delivered through higher rates. Another is that the fear was of inflation, and another is that traders were worried by the prospect for a decline in economic growth following an “overshoot” by the Fed. At least it was clear that the market feared that the “Goldilocks Economy” – where growth would continue but more slowly, and without provoking inflation – was not going to happen.
There was a more obvious trigger for the renewed selling of the past week. The sharp ratcheting up of global uncertainty has fed through into share prices, both through the rising oil price – which could damage companies reliant on consumers’ discretionary expenditure – and through a heightened nervousness that reveals itself in a readiness to take almost anything as a cue to sell.
The Vix contract – which measures volatility from the behaviour of options on the S&P 500 – rose 32 per cent this week. Several earnings announcements from companies produced savage responses. The tech sector, in particular, saw selling even when companies had said nothing, as investors braced for the worst.
So, having sold in May and gone away, when should investors return? Both St Leger Day and the Americans’ favoured re-entry date on Halloween look over-optimistic at present.
Look at it this way: how soon can we reasonably expect the various uncertainties to be resolved? On the corporate front, we should at least know the worst in another couple of weeks – and the consensus expectation is still for a rise of more than 13 per cent in the profits of S&P 500 companies.
But there is not a glimmer of the kind of news event that could emphatically bring an end to the market’s political worries, either over Iraq, or Iran, or Israel. These are complicated situations, and it will take a while to instil calm.
And on the Fed, it is also difficult to see how swiftly uncertainty can be resolved. Even if there is no rate rise next month (which would certainly be quite a fillip for the market), uncertainty over whether this was merely a “pause” would probably persist for the next two meetings after that. There is a continuing drip of economists raising their forecasts for the high point of the Fed funds rate, which many now believe could reach 6 per cent (it is currently at 5.25 per cent).
In the circumstances, with an inflexion point in monetary policy coinciding with a relatively new Fed governor, the one certainty appears to be more uncertainty from here to the end of the year.
john.authers@ft.com
posted by Carlos T Mock at 9:09 AM
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