Time flies when you are having fun! We are posting late to start the month of June unfortunately due to my travel schedule. I know it is no excuse, but I am just ask you forgive me. Let’s start with the returns for the major market indexes in May:
- Dow Jones Industrial Average – up 0.8% (May) & up 0.6% (YTD)
- S&P 500 Index – up 2.1% (May) & up 3.6% (YTD)
- NASDAQ Index – up 3.1%% (May) & up 1.4% (YTD)
- Russell 2000 Index (small cap) – 0.7% (May) & down 3.4% (YTD)
The theme of sell in May and go away didn’t work out well as you would have missed out on the opportunity to move back into positive territory for the year. What was the primary driver for the indexes to move higher last month? Simply put… what is perceived to be an improving economic outlook for the second half of the year. As you can tell by the way that is worded, I am not exactly buying into the argument. Yes, the economy is growing slowly, but in the first quarter it actually retracted 1%. The outlook for the second quarter is 2% growth… not seeing that in the numbers just yet. As we discussed last month the rotation from growth stocks to value or defensive stocks was in vogue. That has shifted slightly since with money trickling back towards the growth stocks. As you can see on the chart below of the NASDAQ 100 index, the low established on April 11th has held up and following the May 15th test has moved higher and eclipsed the March highs. So much for the selling… at least for now.
Does this mean all the worries on Wall Street are over and the markets will have smooth sailing from here? I don’t believe I would go that far, as the upside catalyst has been a worry unto itself. I wrote in my daily notes last week, this has been a no name catalyst. There is no one news event or fundamental data point that has driven the current trend higher, therefore we just go with the trend until it breaks and then we make our adjustments. Similar to the cartoon below from Hagar the Horrible… Just Keep Hamming!
Last month we discussed the earnings concerns from the first quarter. They have not improved based on the actual data reported, but as we continue discuss fundamentals don’t matter, until they matter. To this point, they have not mattered, otherwise we would have seen a correction based on the earning reports. This is one reason you continue to read and hear reports on the market being overdue for a correction. To that issue we say, a watched pot never boils. It is the thing that most believe will happen than seems to never happen.
Is there a correction on the horizon? I would have to say yes, at some point, but attempting to be prophetic about when and how much will give you grey hair or make you pull it out one. For that reason we believe it is best to stay the course and let the trend unfold one day at a time. Last month things didn’t look good as some the indexes were in position to break lower and actually effect the intermediate term (9-18 months) trendlines. That started to change on April 11th with the low established (hindsight is 20/20), and it continued with the move higher from the bottoming consolidation on May 15th. Now the buyers are happy and the trend are still to the upside. The only ones still on the outside looking in are those who believe the market is on the cusp of making a break lower. Follow the trend, not our belief and you will be fine. The trend will tell in advance when the tide is turning it is time to shift money out of harms way. Thus, patience wins the race.
The war in Russia with the Ukraine never developed. That in turn created an opportunity for the owning Russian stocks. That is not a position readily available for a 401k account, but it was one you could have added in your other portfolios. I bring this up because the global markets are looking for positive overall with the EAFE index (Europe, Australia and Far East) moving to new highs. Europe has improved along with the outlook for the Emerging Markets. Again, this is all positive news influencing the US markets.
What about the economic lethargy we discussed relative to the US Stock Market. It is taking baby steps to improve. The ISM manufacturing data released on June 2nd showed some improvements in the sector, but nothing spectacular. The same has been true with each report… minor improvements, but nothing that makes me a true believer in the growth of the US economy or earnings potential going forward.
The reasons for the rally or bounce in the markets for May are all suspect, but that doesn’t make the move any less real. In other words we can think whatever we want, but we have to invest with the trend of the indexes now and looking forward. The chart below is a weekly chart that shows the S&P 500 index since the current uptrend started in November of 2012. As you can see it is still heading up and to the right, despite all the negative talk to the contrary. The trend is up and that is what we all want for our money. Until the trendline is broken by price on the downside we keep moving forward. Yes, we have to take into account what is happening short term, but we invest long term and take it all in stride. When the signals say to sell and get out of the way of a selling market, we will sell and get out of the way. Until then we stay the course, stay focused on our objectives, and let everyone else worry about things we nor they can control.
You will also note on the chart that the index hit a new high in May and it is still poised to move higher currently. Thus, selling in May would have been a mistake. Looking towards June, it is summer and we can think of more reasons based on the current earnings, revenue growth, job creation, stagnant salary for workers, etc. etc. etc. But, it only matters what the buers and sellers do relative to ownership of stocks. If they believe, the buyers will take control of the trend. If they stop believing the sellers will take over the trend. The goal is to follow the leaders as they establish the trend and let it play out over the longer term. The point is simple have a strategy for managing your money in accordance with your defined risk tolerance. Follow the strategy with extreme discipline and keep moving forward one day at a time with your eye on the prize.
The following is our current allocation for 401k portfolios:
- 100% of assets allocated to the S&P 500 index funds. For our allocation we are using the Fidelity S&P 500 Index Fund (FUSEX). We have held this position since the start of the year with no changes.
- Jan 1st NAV = $65.20
- May 31st NAV = $68.41 (change YTD = +4.9%)
- Current Allocations from Paycheck (deposits) = 100% Fidelity S&P 500 Index Fund.
If you don’t have Fidelity in your 401k you will have a S&P 500 index fund that is similar with Vanguard or whomever the assets are managed by. If you need help simply send us an email with your list of available funds and we will tell you the best match to the allocation. Info@JimsNotes.com is the email address.
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Remember, investing is journey towards a predefined destination. Sometimes the destination changes, but it will always be about the journey, and the discipline it takes to get there.