David VomundSpecial to the Bonanza

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August 23, 2012
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Market Pulse: Sell in May and go away? Not this time

INCLINE VILLAGE, Nev. — After the May swoon stocks began a steady rebound, with the Dow and Sandamp;P 500 sitting at their yearly highs. Many analysts say this rally shouldn’t have happened. They point to low volume, or they say the move is “irrational.” Readers of this column know that I disagree.In April and May, during the height of the European debt worries and the slowdown here and in China, investors had priced in economic and financial conditions far worse than those likely to occur. Investors have done that before, in fact many times. At bear market bottoms it was always true, which is why Sir John Templeton said that the best buying opportunity is at “the moment of maximum pessimism.”We saw such a moment in March of 2009 when the stocks of some of America’s giants (GE, Alcoa, Dow Chemical, Bank of America, Citi, International Paper, for example) were trading near $5.00 or less. Since then the Sandamp;P 500 has more than doubled and many stocks have done even better.I am not saying investors are as negative today as they were in 2009, after the 1987 crash, in 1982 and at other times. Gloomy, yes, but not to that degree. Should we care? In a way, yes. Look back to this week 30 years ago. Times were tough, interest rates were sky high, we had double-digit inflation and many millions of people were out of work.Investors had every reason to be down on both stocks and bonds, both of which had done poorly for years. But in August, 1982, stocks began a huge bull market, as did bonds with Treasury yields falling from record highs to this year’s record lows. Why the trip down Memory Lane? Simply to remind you that real-time economic and financial conditions are seldom if ever good indicators of future stock market returns.More often, just the opposite is the case. The worse the environment (1982, 2009), the better the future returns. Watch out when all looks rosy (2000). Stocks will suffer.Many disagree with my optimism for the market. They see slow GDP and profit growth (if any) for years, potential blow-ups from a number of obvious problems here and overseas, the fiscal cliff, and other factors that would undermine a stock market that has more than doubled in three years. All true enough, but problems need not morph into the catastrophes so many see.Not necessarily. They can also be addressed, and smart money is betting they will be addressed since doing so is in everyone’s interest. That is one reason stocks are doing well. Another that I often mention -- alternative investments are unattractive.History shows that bull markets end when valuations are excessive (they aren’t), the Fed is tightening (it isn’t) and investors are giddy (they’re not). Today’s valuations are historically low, the Fed is by its own admission at least two years away from raising rates, and investors continue to sell stocks. In short, conditions are just the opposite of those typically seen at market tops. Let’s stay the course. — David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.


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Tahoe Daily Tribune Updated Aug 23, 2012 12:16PM Published Aug 23, 2012 12:16PM Copyright 2012 Tahoe Daily Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.