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Sell in May and Go Away is Not Looking Good This Year

Sell-In-May

Yeah – how’s that advice working out for investors these days?  Patient and prudent investors will probably close the summer out with a 3 pointer from the top of the key and will get to yell out “IN YOUR FACE!”  Or better yet, are yelling it out from their beach chairs…

Out of nowhere, we have seen a silent summer rally.  I saw a clip this week of a financial advisor on Fox Business who was asked back on the show after calling May the beginning of a “bear market”.  Watching him explain that call was as amusing as watching a 5 year old trying to get out of those tubular Finger Cuffs you get at a school fair.

While the week was a loser overall, both the Standard & Poor’s 500 (S&P 500) and the Dow Jones Industrial Average (Dow) closed higher on Friday as Federal Reserve (Fed) Chairman Ben Bernanke reassured markets by saying that the Fed still has “scope for further action.” The discussion over further easing will continue this week as the Fed chairman is scheduled to speak in Jackson Hole.

Here’s how the markets ended up for the week. Note that I’ve added some new information.

index 8-27-12 yields commodities

According to the minutes from the July 31 – August 1 Fed meeting released last Wednesday, it appears they are gearing up for new measures that they believe will encourage economic growth, better insulate the U.S. economy from global shocks, and lead to more acceptable conditions for the unemployed – all without stoking any inflation.

The minutes revealed, “Many members judged that additional monetary accommodation (this means new policy measures) would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery”.

Problem – There hasn’t been much economic data suggesting that “a substantial and sustainable strengthening” in the recovery is at hand.

Substantial?  Hardly.  Sustainable?  Ummm…possibly.  Substantial AND sustainable?  No.

Fed members believe that another round of Quantitative Easing (dubbed “QE3”) would put “downward pressure on longer-term interest rates by contributing to easier financial conditions.” In other words, they believe it would encourage businesses and consumers to spend and borrow.

I think higher equity prices make people feel wealthier and that’s the best way to encourage additional outlays.  In fact, with rates as low as they’ve been over the past few years, if people are not borrowing now it’s not because of rates.

Upcoming Week

In addition to the aforementioned Fed meeting in Jackson Hole, which will probably be the highlight of the week, we have European Central Bank (ECB) President, Mario Draghi, taking the stage on Saturday at Jackson Hole as well. His late July promise to do whatever it takes to save the euro has played a big role in calming European debt markets and providing support for U.S. equities. Market participants will be looking for more signs that the ECB is set to provide some follow through at its early September meeting.

Our Thoughts

Our position remains that the U.S will not see a double dip recession so long as housing does not experience another downturn, and our domestic economy will continue to grow in the most modest of ways.  2012 will probably end up looking a lot like 2010 and 2011, where slightly weakening or sideways markets will give way to improvement over the Fall.  Given that a little weakening or sideways action would take place from a +11% YTD number on the S&P 500 suggest to us that the overall YTD return should be much better than people may think.

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Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values.  The 2, 10 and 30 year Treasury is simply the yield at the close of the day.

(1)      West Texas Intermediate crude spot price is as of end of week.

(2)      London Bullion Market Association; gold fixing pricing at 3 p.m. London time.

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