Good Riddance April
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Paul Rabbitt
Rabbitt Analytics.com |
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April has ended and many will say good riddance. A firm rally Friday allowed stocks to book a meager gain for the week. Conflicted by lower oil prices (below $50), an ebbing economy (a major GDP shortfall), but strong corporate earnings (14.6 percent with 75 percent of S&P 500 companies reporting), the S&P 500 managed to deliver returns slightly better than flat last week. April was the biggest down month for the DJII in more than two years.
The S&P is down 4.5 percent this year. The Russell 200 small-cap growth index is down 12.9 percent. The NASDAQ is down just under eleven percent. Suffice it to say, anybody betting on the economy, except for energy, got a bashing this year. The average US stock fund returned -6.55 percent year-to-date through last week. Lest anyone think they should hide money in gold, the average gold fund declined 14.85 percent - whatever happened to gold's negative beta (tendency to move the opposite direction of stocks)?
Risks Remain Our Primary Focus
We are maintaining 40 percent cash and have a few short positions. Monetary conditions are no longer accommodative. The Fed has not signaled it will soften its tightening phase. The economy is slowing. Stocks are overbought and near the tops of their trend lines. Additionally, these trend lines are downward. Because of the slight rally ending April, stocks now have a small positive expectation built-in to their prices. Fundamental risks in the intermediate future include: the Fed did not change its policy statement after meeting this week and second quarter earnings will lag first quarter earnings considerably. Moreover, the recent trend to weak economic data continues, and oil prices could easily rise again.
Sentiment Improved
On the plus side, sentiment (a contrarian indicator) has improved. Mutual fund managers have increased cash levels. Bullishness has slipped in all four polls we monitor. The public/specialist short ratio has skyrocketed to a high unseen previously (higher than 911). However, sentiment is a background factor, not an immediate timing tool.
Urgent Selling Has Abated
That said, it seems as though the urgent selling has abated here. President Bush has been apparently successful in jawboning the Saudis into hiking oil production levels another 15 percent. In what could even be credited to the hawkish Bush-camp's foreign policy, Syria completed its pull back from Lebanon. Aside from poorly received social security reforms, April closed fairly strong for the Bush camp
Fed Met Tuesday and Maintained Policy
The FOMC met Tuesday and raised up 25 basis points. Contrary to some who were betting the Fed would guide expectations away from their "measured pace" policy of rate hikes, the Fed left its language unchanged. The Fed's policy of normalizing interest rates is starting to have an effect on the economy.
Small-caps will continue to suffer. They have less ability to withstand economic weakness. Small-caps tend to be economically-sensitive. Lack of pricing power and rising energy costs will squeeze profits. Size has been extremely important (higher market cap is better). Price has been important (higher is better).
We suggest minimal exposure to economically-sensitive issues, small-caps, and the technology-laden NASDAQ. We are emphasizing strong values in our recommended portfolios.
Defensive stocks usually are more attractive in the later stages of economic recovery. Since this recovery is aging and softening, stock leadership has changed hands over to defensive stocks. We have recommended moving away from economic sensitivity and into defensive issues. Companies with consistent stable growth rates regardless of the economy's health, which make money without the constant need for higher prices, will evolve into leadership.
Paul Rabbitt
will be available to take your questions until Thursday, May 12. Please use the form below to submit your questions. |
