In the words of William Shakespeare – Much Ado About Nothing. With all the discussion of debt ceiling, U.S. default, and economic doom the markets were noisy but didn’t do much in May. For May, the NASDAQ finished positive 7.88% and sits positive year-to-date 30.89%. The S&P 500 was positive 0.25% is positive year-to-date 8.86% while the Dow lost 3.49% and is down 0.72% year-to-date.
The debt ceiling is a tired topic but can’t be ignored. The markets have been 100% certain a deal will be reached based on the way it has traded this month. The real unknown is what the final deal will look like. While major spending cuts could create a dourer economic backdrop, not reducing spending pushes us closer and closer to the fiscal cliff.
While the markets have priced in interest rate cuts in the second half of the year, I haven’t bought that story for one minute. The Fed has done its best to warn investors that while they may pause, based on the leading economic indicators, further rate hikes are more likely than future cuts. When the Fed is flashing its cards for all to see, take their word for it.
The economy continues to expand, but it appears almost all expansion is somehow related to services rather than manufacturing and industrial growth. With rising credit card debt, rising interest rates, shrinking money supply (M2) (we’ve written about that several times this year), and potential for rising energy costs (more about that in a minute), I watch unemployment. If unemployment rises ½% or 1% that will be a good indicator that the Fed’s attempt to slow the economy is working and recession is usually 30 – 90 days old by the time that happens. We’re not trying to say the economy is already in recession. What we are trying to do is show that we are not out of the woods yet and we think prudent investors need to be prepared for short term volatility over the coming year.
What about energy costs? The Saudi Arabian energy minister indicated recently that he is ready to cut production again should crude prices remain lower than they want. OPEC made a surprise cut back in April, energy demand appears to be picking up again, and we are now in the drive season between Memorial Day and Labor Day with expectations that there will be more travelers in the United States than there have been in over 20 years. All of which could provide a tailwind for energy prices this summer.
The June Swoon? Over the last 100 years, the Dow has averaged a gain of 0.44% during June with a positive return half the time. However, over the past 20 years June has been much weaker with an average return of (0.52%), declining about 60% of the time. In terms of average change and consistency of gains, no other month has been weaker. (Source: Bespoke)
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