Stocks: Will a June Swoon Follow Sell in May?

by Dan Burrows | June 1, 2012 7:30 am

May was a terrible month for stocks and — with the exception of the dollar and Treasurys — for pretty much every other asset class, too. With Greece and Spain straining the eurozone to its breaking point, disappointing economic data in the U.S. and slower growth in China, India and Brazil, well, investors shouldn’t be surprised by a June swoon, either[1]. And today’s employment report[2] (just 69,000 new jobs — ugh) pretty much ensures the new month will pick up where May’s bummer ended.

By the same token, neither should investors ignore the very real possibility of a snap-back rally sometime this month. That’s why long-term investors should sit tight[3] and stay frosty, lest they sell low and only lock in losses.

Besides, apart from cash or short-term bonds, it’s not clear where they would go anyway, since the selling has been so widespread.

The frantic flight to safety has pushed the yield on the benchmark 10-year Treasury note to as low as 1.54% at one point on Thursday, tying a record last hit in 1946. Meanwhile, the U.S. dollar index, which measures the greenback against a basket of major currencies, gained a whopping 5% in May, putting it close to a two-year high.

The stronger dollar and dimmer prospects for global growth (and inflation) pounded commodities and currencies in May. Just have a look at these ugly numbers:

Indeed, except for the dollar and Treasurys, pretty much the only assets that worked in May were natural gas and the yen. Yup, it was a washout.

But that doesn’t mean you should just up and sell. Markets are very much glued to the outcome of the Greek election set for mid-June, and we wouldn’t be surprised if stocks remained volatile but range-bound at least until then.

And besides, we’ve been through this before — all too recently. Remember that stocks suffered through spring and summer sell-offs in the past two years, as well. If it’s any consolation, this year’s drop has so far been comparatively less severe.¬†Furthermore, corrections like the one we’re in now aren’t only common, but have historically been followed by profitable reversals.

Since the current bull market began in March 2009, the S&P 500 has had 15 corrections of more than 5% that were preceded by at least a 5% rally, just like this year, notes Liz Ann Sonders, chief market strategist at Charles Schwab (NYSE:SCHW[4]).

The average decline of those 15 corrections comes to 8.2%. Since the S&P 500 is currently off 8% from its most recent high, there’s good reason to believe the downside from here will be contained. Sonders figures the current downdraft will remain in the typical 5% to 10% range.

Jeff Saut, chief investment strategist at Raymond James (NYSE:RJF[5]), likewise sees the market’s declines petering out soon. For one thing, the current selling stampede is now more than 20 sessions old, and they tend to last no more than 17 to 25 sessions. The technical indicators, too, point to at least a short-term bounce, by Saut’s reckoning.

Meanwhile, if you’re tactically minded, the defensive sectors of health care, utilities and consumer staples have historically outperformed from May to October, at least since 1989, according to Schwab and The Leuthold Group.

Yes, you could overweight those sectors heading into June, but then you never know when this bipolar market could switch from risk-off to risk-on again — and trying to time it is a fool’s game.

If you’re dollar-cost averaging into stocks for the long haul, take comfort in the fact that you’re buying them at cheaper prices these days. Maintain long horizons, and remember that even if we do hit a June swoon, that too shall pass.

Endnotes:
  1. investors shouldn’t be surprised by a June swoon, either: http://investorplace.com/2012/05/5-signs-of-an-ugly-summer-for-stocks/
  2. employment report: http://www.bls.gov/news.release/empsit.nr0.htm
  3. long-term investors should sit tight: http://investorplace.com/2012/05/america-is-stuck-in-a-seinfeld-market/
  4. SCHW: http://studio-5.financialcontent.com/investplace/quote?Symbol=SCHW
  5. RJF: http://studio-5.financialcontent.com/investplace/quote?Symbol=RJF

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