For starters: I think it’s both irresponsible and laughable to write stories about Dow 5,000, a return to the gold standard or other economic apocalypses that will leaves us all wearing sackcloth and bartering canned goods.
But right now, it’s also willfully naïve to think the next 60 to 90 days hold anything but trouble.
I certainly don’t advocate going wholly to cash to lock in big losses or hamstringing your strongest picks in the middle of earnings season. But you may want to consider pulling in partial profits on a pop by taking some shares off the table, and you may want to consider sitting on your hands instead of “bargain hunting” in a downdraft.
If you have strong long-term investments in dividend stocks, that’s fine. But for you active traders out there, here are seven reasons you may want to take a vacation until Thanksgiving:
1. The Long-Term Secular Bear Market
First, the big picture: We have been stuck in a stagnant, sideways market — a “secular bear market” as some like to coin it. But contrary to the arguments of the doom-and-gloom crowd, a secular bear isn’t characterized by a sharp or even a gradual crash. Rather, it’s marked by alternating ups and downs that always get the major indexes back to where they started.
Check out this excellent chart from an even better post by Robert Seawright’s blog, Above the Market. It shows that in times like these, what goes up must come down. Unless you believe that March 2009 was a true bottom and it’s only blue skies ahead … expect a correction soon as we near the peak and turn again toward a new trough in this cycle.
Seawright notes that “on average, these cycles have each lasted about 17 years.” We are about 15 into this one.
2. Low Volume Equals High Risk
In recent years, financial turmoil has tended to materialize in August, when trading volumes in stocks, bonds and currencies all decline. With fewer investments in circulation, it’s easier for sellers — no matter their size — to move markets as they head for the hills (or the beach, as it were).
For a history lesson, look at this ugly chart for Augusts across the last 15 years. The Dow Jones Industrial Average posted only five down years out of the last 15, for a typical gain of around 6% annually. Meanwhile, August is down 7 of 15 years — sometimes by an astonishing degree. Note the August crash of 1998 despite an up year for the index, for instance, or the rough Augusts of the last two consecutive years.
3. The U.S. “Recovery” Is Stalling
Optimism is giving way to caution for many consumers and businesses. On the consumer side, monthly retail sales have flagged three months in a row since March, and recent reports indicate July will finish down about 1.3% to continue the trend.
On the business side, Goldman Sachs (NYSE:GS) and Deutsche Bank (NYSE:DB) both cut forecasts of second-quarter growth to just over 1%. According to a recent USA Today report, 99 companies in the Standard & Poor’s 500 lowered second-quarter earnings projections. Manufacturing activity in June hit the lowest level since 2009.
It’s been three months of bad news on a host of fronts.
4. China’s Hard Landing
You may think that China’s slow growth isn’t that big a deal. After all, Chinese equities have long ago peaked, and economic growth there is still pretty nice at above 7%. But the reality of China’s hard landing is pretty stark for U.S. exports.
Consider coal — a commodity the U.S. exports to China en mass but has limited interest in at home. A recent UPI report says three of the largest coal storage facilities in are sitting on record levels of inventory. That explains the crash in U.S. coal stocks and the bankruptcy of Patriot Coal as demand dries up.
Now, extrapolate that to the other industries that rely significantly on China. Ford (NYSE:F), General Motors (NYSE:GM) and other automakers have bet the farm on China vehicle sales. Casino stocks like Wynn (NASDAQ:WYNN) have bet the farm on Macau resorts. Luxury-goods companies like Coach (NYSE:COH) and Tiffany (NYSE:TIF) are betting the farm on China’s expensive tastes. Even booze bottlers like Diageo (NYSE:DEO) are betting the farm on China.
Get the picture? Any slowdown in China and subsequent ding in sales and/or expectations will drag significantly on the global economy. The recent drumbeat of headlines has been particularly bad, from worsening fears of a Chinese real estate bubble to significant trouble on the import and trade front.
Expect more ugly headlines over the next several weeks as the reality of China’s economic setbacks set in.
5. Germany Is Abandoning Greece, All Money is Abandoning Spain
Greece has fallen behind with its budget cuts and is asking lenders for more time to meet the conditions of a 130 billion euro aid package — including 50 billion euros in additional funding. But according to reports in German media, neither Berlin nor the IMF are prepared to make that money available. German politicians have said the prospect of Greece being booted from the monetary union “has long ago lost its terror.”
Chancellor Angela Merkel now seems more concerned with shoring up her own country than saving any monetary union. There’s even tougher talk (is that possible?) from Germany after Moody’s (NYSE:MCO) lowered the outlook to negative on the country’s top AAA credit rating.
And of course, the more recent problem in the EU has been Spain. Consider that Spain’s economy sank deeper into recession in the second quarter as economic output shrank by 0.4% after a 0.3% decline in Q1.
If you want to see why the economy is tanking, just look at what investors in Spain are doing, according to a great chart in London’s Telegraph provided by Credit Suisse (NYSE:CS) data. Anyone with money is fleeing Spain like rats from a sinking ship. And note the graph only goes up to the end of January — more recent data would assuredly only tell a worse tale.
Meanwhile, Spain’s sovereign bond yields stayed mired in the danger zone of around 7% — almost what I get charged on my credit card if I carried a balance (which I never do).
Even if Greece doesn’t ruin the eurozone, Spain is getting awfully close to critical mass itself.
6. That “Fiscal Cliff” Thing
The hyperbole gets to me sometimes, but there’s no doubt the idea of the “fiscal cliff” is a reality. A combination of expiring tax cuts and slashed federal spending set for Dec. 31 would cut the federal budget deficit by an amount equal to 4% of U.S. gross domestic product, throwing millions of people out of work. It may not be the end of America as we know it, but it will be pretty ugly.
Worse, many economists think even a compromise that extends some tax cuts and reduces or delays spending cuts could reduce growth. After the gridlock of the 2011 debt ceiling debate and the looming election in November, it’s pretty much a sure thing that we’ll get a bitter compromise at best.
The political theater surrounding this “fiscal cliff” can’t (and shouldn’t) wait until the lame-duck session after Nov. 6. Expect some fireworks and some market volatility.
7. [Fill in the Blank]
Perhaps the biggest issue with the current market environment is the weight of uncertainty. In every market, there’s no way to know what will happen next … but it seems that these days, the unexpected is decidedly negative.
When is the last pleasant surprise we got? News of Apple’s dividend? Reports that housing has bottomed — not that it’s recovering, mind you, but that the wound has stopped bleeding?
You never know what Wall Street will hold next. And there’s always the chance it could be something good and something encouraging.
Or it could be something ugly, just one more garbage bag to throw on the market’s dumpster fire this summer.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.