Should Investors be Cautious?

April 26, 2013

Sequester

In our last update, we spent some time talking about the “sequester”, which is basically some spending cuts to the Federal Government’s budget that took effect on March 1, 2013.  We concluded that the sequestration cuts, along with the tax increases implemented in January are a prudent step in the right direction and were not likely to be disastrous to the economy.

Hopefully that will prove to be correct, but the employment report from March did take a step backwards.  The employment report, which was released on Friday, April 5th, showed that the “non-farm payrolls” (number of jobs gained or lost) only increased by 88,000 in March, vs. 268,000 in February.   To put this in perspective, we need around 100,000 jobs gained per month in order to keep the unemployment rate steady (currently at 7.6% for March).

We will have to see if the employment numbers can rebound over the next few months, but in the meantime, the stock market is taking it in stride.  This is a delicate balance; the stock market investors would like to see employment improve, but not too fast…why?  Because the Federal Reserve is being very accommodative, meaning that they are doing all they can to keep interest rates very low, which is generally good for businesses and for stocks.  So if the employment picture improves too quickly, then the Fed will have to worry more about inflation and have to start increasing interest rates.

Worst Six Months

Another reason to be cautious over the next few months is that we are about to enter the “worst 6 months” part of the calendar.  We have discussed this in the past, but to review, if you go back to 1950 when the S&P 500 index began, most of the gains in the stock market have come from November to April.  And from May to October the stock market on average has been pretty flat.  Below is a chart from the Stock Traders Almanac which shows how this strategy has fared since 1999:

 graph

In the world of investing, nothing is perfect and nothing works every time, but this strategy has a pretty good track record.  In addition, we know that this phenomenon is well known by most investment advisors, and the more that use this idea, the more self-fulfilling it becomes.  It won’t overrule everything else, but it is a factor to consider.