May started the way the old adage goes regarding stocks: “Sell in May and go away!” Lately, that has been lousy advice, but May 2019 was harsh. The Dow Jones Industrial Average had gone down for six weeks in a row – the first time in five years, according to Bespoke Investment Group. June has arrived with a much nicer sense of humor, but why?
The exodus of stocks into bonds during the month of May was massive movements of dollars or what the financial industry calls flows. The sentiment indicators – a measurement if people think the market will go higher or lower – was nearing a crisis stage, and that is a beautiful thing for the markets!
We think of sentiment as a contrarian indicator. When everyone is happy and fully invested investors are often disappointed, and then people sell, bringing the market down. The worse the news, the more negative the sentiment becomes until it is so negative that it becomes positive. That appears to be what is happening here in June.
The drop in the treasury yield on a 10-year bond is one of the most significant drops in a short period that we have witnessed. If you think stocks have been volatile, you should pay attention to these markets. The move created many red faces as it violated expectations of almost every fixed-income manager. This drop is concerning in some ways and hopeful in others.
Whether or not the Federal Reserve has any business paying attention to the stock and bond markets is moot at this point. They will do what they will do but what they say or imply they are going to do can change the direction of markets at an unhealthy pace leaving innocent bystanders in their wake.
The market began its late plunge in October last year and created the worst December since 1931. The Federal Reserve rescued the markets with 180 degrees about-face late December, and we watched the markets move to their best January since 1987. May was all about new tariffs on both China and Mexico and even India was brought into the game. The equity markets didn’t like that at all, and a sizable sell-off ensued. Suddenly the talk of delayed tariffs and negotiations coupled with “Fed Speak” of rate cuts rather than interest rate hikes created another heroic rescue for the equity markets.
How June, the quarter or year will finish from a stock market point of view is difficult to estimate. The economy is still growing just not as fast as last year. Earnings are still good. There was concern over the new jobs number being lower than expected, but our unemployment rate remains at 3.6%.
As your dollars are deployed to investments, know that there needs to be a reason for each and every decision. But when looking at the markets know that much of the movements in this volatile time will be determined by Washington more than fundamentals of the economy.
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Sources:
https://www.wsj.com/livecoverage/may-2019-jobs-report-analysis
https://www.cnbc.com/2019/01/31/the-best-january-in-30-years-could-mean-good-things-for-the-stock-market-in-2019.html
Disclaimer: Joseph Clark is a Certified Financial Planner™ and the Managing Partner of Financial Enhancement Group, LLC an SEC Registered Investment Advisor. He is the host of “Consider This” found on WIBC Saturday mornings from 6-7a.m. as well as three other Indiana-based radio stations. Joe has served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning.
Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc., Member FINRA/SIPC, and a Registered Investment Advisor. Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group. FEG is not owned or controlled by World Equity Group.
Joseph Clark and World Equity Group, Inc. do not provide tax or legal advice. For tax advice consult with a qualified tax professional. For legal advice consult with an attorney.
