While “Sell in May and go away” was very good advice for 2012, what are the implications for June? So asks Taesik Yoon of Forbes Investor.
In last month's issue, I suggested that the next several months could prove to be disappointing ones for equities. Yet I have to admit that the speed and magnitude of the decline in stocks last month was far greater than I expected.
As noted in the prior mid-month update, the catalysts spurring the selling are old hat by now, since they are the same ones that have been responsible for just about every major market decline over the past year.
The major driver remains Eurozone sovereign debt woes. This has taken center stage once again due to the rejection of austerity measures by Greece last month. Because these measures are required in order to receive additional bailout funds, the rejection increases the possibility that Greece will fail to meet its debt obligations, which could result in additional economic instability in Europe.
Magnifying this concern and placing the fate of the euro in even greater jeopardy is the worsening economic situation in Spain. The nation is currently in recession and had the credit ratings of 16 of its largest banks downgraded by Moody’s in May. Concerns over the health and pace of the recovery in the US job and housing markets have also heightened due to the release of several unfavorable economic data measures, including a downward revision in first quarter GDP.
I don’t want to discount the seriousness of these market headwinds or the additional damage they can do to equity values. Nevertheless, the declines experienced by many of our recommendations last month were simply hard to believe. This is especially true in view of the fact that quarterly results during the past earnings season were largely positive—with about 75% of S&P 500 companies exceeding expectations.
Our scorecard during the past earnings period was similar with most of the companies on the Forbes Investor Master Buy List that reported results beating analysts’ estimates. Even though the vast majority of these firms were trading at relatively cheap valuations prior to their earnings release, they continue to sell off—some by a significant margin.
Perhaps I should not find this too surprising. After all, if the stock markets have shown me anything over the past several years, it’s that corporate valuations can and often do go ignored.
But that recent history has also shown the willingness on the part of investors to reenter the market after a swift but severe sell-off. The last time the Master Buy List fell more than 10% in a single month was September 2011—where it dropped 14.4% on many of the same concerns currently weighing on the stock markets.
However, it rebounded strongly, surging 16.7% the following month, after third-quarter earnings for most of our recommendations proved better than expected.
I’m not saying that will be the case here. June has not been a particularly kind month for equity investors. It also lacks the type of catalyst, such as the reporting of corporate earnings, which fueled the rebound last October. But given the magnitude of the sell-off in May, I think that equity values on the whole are getting close to the level that could trigger a similar rebound in the not too distant future.
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