The stock marketappears to be taking a well-deserved breather after a double digit first quarter 2012 return. Volatility has increased recently and we find ourselves back nearly where we started the month. We continue to see a disconnect between corporate earnings (very strong) and U.S. economic data(getting better but still not great).
Through yesterday (Wednesday), over 80 percent of the companies that had reported in the S&P 500had reported quarterly results that exceeded expectations. Despite these strong numbers out of U.S. corporations, it is not surprising to see the market level off given the strong 1Q12 showing and the concerns about Europe that seem to once again be rising to the surface.
Should one “sell in May and go away” as the Wall Street saying goes? This strategy would have been a profitable one in 2010 and 2011. Though there are many negatives on the horizon, Farr, Miller & Washington doesn’t try to time the market. Client assets are invested with a long-term time horizon and portfolios are designed to weather whatever storm might suddenly pop up. Still, there are several different areas that we are monitoring closely as we manage our client portfolios.
First, Europe remains in the news. The ECB’s decision to pump liquidity into the European banks appears to have staved off a European credit crisis. This is a huge positive and a major reason that the stock market has acted so well over the past couple of quarters. However, European countries remain saddled with too much debt while growth prospects remain scant. Here are a couple of items in the news that bear watching as the year progresses:
o The French have their second round of presidential elections on May the 6th and it looks like they will elect Francois Hollande. He is a representative of the French Socialist Party. What we are seeing in France is a sort of gravitation toward less austerity. Generally speaking, no one in France wants to tighten down the economy too much.
o The Dutch government has collapsed due to budget disagreements and voter dissatisfaction with too much austerity.
The French and Dutch situations in turn create problems for the entire European Union. Germany, currently the strongest player in the EU, is still calling the shots for the EU as a whole. This has allowed them to push for necessary austerity and other changes.
But Germany’s domination of the EU has relied upon a generally collegial group of member countries who are willing to follow and support the German lead. To the extent that they have all been singing from the same song sheet, markets have found strength and sustenance and have recovered in timely ways. This collegiality appears to be disappearing.