Stocks edge lower on renewed global growth concerns

It is not necessary to do extraordinary things to get extraordinary results. …By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals. – Warren Buffett

Stocks edged lower last week as weaker than expected economic data from both the U.S. and China caused renewed concern among investors that global growth was slowing. These fears first surfaced back in January and February and led to a huge sell-off in stocks that resulted in losses in excess of 10%. Since then, the stock market has rebounded strongly on the belief that economic growth would improve and lead to better corporate profits and higher stock prices. After anemic first quarter gross domestic product (GDP) growth of just 0.5%, investors received more bad news last week as the ISM manufacturing index fell and was below expectations. China’s manufacturing data for April was also disappointing as it fell again and remains below 50, indicating continued contraction in the sector. To add insult to injury, the normally strong U.S. employment report suffered a setback in April as only 160,000 jobs were added, far short of the 200,000 plus jobs that had been expected. The number of jobs created in the two previous months was also revised lower and the labor participation rate fell to the lowest level since January. Productivity dropped and remains low and even though wages rose by a 2.5% annualized rate, recent wage growth has been modest. With the first quarter earnings season winding down, corporate profits have declined about 7% from year-ago levels but have managed to mostly exceed reduced expectations. The same cannot be said for revenues as only about half of the companies that have reported so far have beaten estimates on the top line. The focus for the market now will be on macroeconomic data and the next meeting of the Federal Open Market Committee (FOMC) in June. Given recent sluggish economic data, it’s highly unlikely that the Fed would raise interest rates. Of more concern is the ineffectiveness of the Federal Reserve and other global central banks to augment growth through monetary policy.

Last Week

Not all of the economic data released last week was negative. Construction spending rose in March and reached its highest level in over 8 years and March factory orders were better than expected. The ISM non-manufacturing or services sector index also rose and is comfortably above the 50 threshold, a strong sign of continued expansion. The U.S. trade deficit shrank in March to the lowest level in more than a year. Despite rising by 17,000 last week to 274,000, the trend for jobless claims still supports a strengthening labor market.

For the week, the Dow Jones Industrial Average edged down 0.2% to close at 17,740 while the S&P 500 Index fell 0.4% to close at 2,057. The Nasdaq Composite Index declined 0.8% to close at 4,736.

This Week

After dropping in March, retail sales are expected to rebound strongly in April with a gain of about 1%. The producer price index (PPI) for April is forecast to increase slightly after posting a negative reading last month. China also reports on both producer and consumer prices in April. A number of Federal Reserve presidents are scheduled to speak on the economy and monetary policy.

In overseas news, the Bank of England meets and is expected to leave interest rates unchanged while Euro-zone finance ministers will hold a special meeting to review and discuss the finances of Greece.

With nearly 90% of companies having already reported first quarter earnings, the results have generally been good relative to expectations. Among the top companies due to release earnings this week are Walt Disney, Allergan, Dean Foods, Tyson Foods, Kohl’s, J.C. Penney, Nordstrom, Macy’s and Dun & Bradstreet.

Portfolio Strategy

With the month of May upon us, the old stock market adage “sell in May and go away” has returned as a way that investors could play seasonal stock market performance. This adage is based on the simple belief that stocks tend to underperform during the period from May to October and that investors would be smart to sell their equity positions in May, invest the proceeds in a money market fund and then buy their stocks back in early November. Historical data shows that stocks tend to perform better for the six-month period from November through April and that the summer months tend to be weak ones for stocks. While there is some truth to this claim, there also are exceptions, such as in presidential election years and years when the stock market has posted positive returns through April. In 2016, both of these exceptions exist, although equity returns have been modest in the first four months of the year. In these cases, the period from May through October has been favorable for stocks and an argument could be made that investors stay put. A strategy to “sell in May and go away” is really a form of market timing, which has proven to be a losing proposition for investors time and time again. Not only do they have to be right on when to get out of the market, but they also have to be right on when to get back in. In a year when most investment strategists are forecasting mid-single digit gains for equities, a better approach would be determining an appropriate asset allocation based on an investor’s risk tolerance and time horizon.