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April stock market and economic review and commentary follows. 

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Tom
Crow Financial

APRIL MARKET COMMENTARY

By Tom Crow
May 8, 2013

 

 

Gain (Loss) by Period

Index

Month End

Month

Most Recent Quarter

Year-to-Date

Trailing Twelve Months

Dow Industrials

14,840

1.8%

7.1%

13.3%

12.3%

S&P 500

1,598

1.8%

6.6%

12.0%

14.3%

Nasdaq

3,329

1.9%

5.9%

10.2%

9.3%

 

The markets finished higher despite a very volatile month. A brief selloff in early April was followed by a quick bounce and another, more-vicious selloff that took the indices below where they started, only to be followed by a strong run up that pushed us to new highs.

 

In that second selloff, the S&P 500 and the Nasdaq slipped just below their 50-day moving averages for the first time since December. The Dow Industrials barely hung on, but the selling was short-lived and the indices quickly recovered.

 

Trading volume is still low by historical standards, indicating a lot of money is still parked on the sidelines. The monthly average of the volatility index (VIX) moved a bit higher, from 13 to just under 14, but still remains quite low, meaning there is a not a lot of investor fear at the current levels.

 

A blowout jobs report last week pushed the Dow briefly above the 15,000 mark for the first time ever, and the S&P 500 seems to have some strong support just below the 1,600 level, which is also a new, record high.

 

It wasn't so much April's jobs that got everyone excited as it was the prior two month's revisions. 165,000 jobs were added to total, nonfarm payrolls; above expectations of 135,000. March's original number of 88,000 was revised up to 138,000, and February's figure was revised up to 332,000 from 268,000. February's burst in job growth was the biggest seen since November 2005 for any month that did not include temporary Census Bureau jobs.

 

The unemployment rate dropped to 7.5% from 7.6%. Job gains are always preferable to losses, but this is still below the level required to push the unemployment rate below 6% any time soon. The 12-month average for job creation sits at 169,000.

 

Nearly one in five workers hired in April took temporary jobs, indicating companies are still reluctant to add full-time employees with paid benefits. There was, again, little evidence of the sequester cuts as government jobs shrank for the sixth of the last seven months by 11,000, bringing the 5-year total to a half-million.

 

Hourly earnings have risen only 1.9% over the past twelve months, such that even the mild inflation this country has been experiencing is sufficient to eat up almost any increase in consumers' purchasing power.

 

I'm still looking for a mild correction, and for some inflation...especially with the Australian and European Central Banks cutting rates, and our Fed's continued quantitative easing, but the louder the bears scream doom and gloom, the harder I look for it and it's just not happening.

 

Gold peaked in early September of 2011, and even after a slight recovery is now at its lowest point in two years. I'm beginning to think the bears and gold bugs are missing something. If they were right, we'd have already seen their predictions of runaway inflation due to low rates and easy-money policies come to fruition.

 

The bears could be partially right and, as discussed in last month's Commentary, markets are only going higher because dollars are worth less. But investors are still better off increasing the number of dollars they are worth by owning stocks than they are losing market value in gold, which is also arguably worse than sitting in cash and slowly losing purchasing power to creeping inflation.

 

I think what the bears are missing is that, despite our government, and others printing trillions of dollars, the world economy has not been flooded with cash. The reserve banks are buying bonds in relatively closed markets, inhabited mostly by big banks that are offloading their bonds and increasing their cash reserves and investment accounts, but not their lending activity.

 

Smaller, local banks and credit unions are lending again, and sub-prime auto loans and pre-approved credit card offers are exploding, possibly creating a new bubble in pending defaults, but that's a drop in the bucket. The big banks are still not lending and therefore, most of the cash the Fed is printing is never seeing the light of day. I've only found one article that supports this view but it makes some sense.

 

With regards to hyperinflation, none of the historical examples cited in an attempt to predict it in this country dealt with a reserve currency. The only example of hyperinflation in this country predates the Fed and harkens back to colonial times when each colony's currency looked different and there was widespread counterfeiting by those who wanted to see our fledging colonies fail.

 

Regardless of the claims made in a handful of incredibly boring online videos, it is highly unlikely that the U.S. dollar would lose its reserve status to another national currency overnight. A much more-likely scenario would be the slow emergence of another, co-reserve currency. The virtual currency Bitcoin collapsed last month and will likely soon be regulated if it survives. If some other attempt is made at linking global exchange rates to a basket of commodities or natural resources, I think this country could put its hands on a sufficient amount of gold, oil, gas, coal, timber, clean water, etc., to remain in a position of authority and power, but environmental policies would probably have to be adjusted a bit.

 

So, what does this mean for our clients and their investment portfolios? We do not subscribe to "sell in May and walk away," but we will take profits and reinvest in other areas when appropriate. We will also tighten up our stops and be willing to cut losses short to protect principal.

 

We will be increasingly selective when it comes to new stock purchases because we do believe a correction is more likely than not. This doesn't mean we'll stop buying stocks, but it will be harder for a stock to make it on our buy list. Stable sources of moderate income and principal protection are more-attractive to me than high-risk stocks with questionable growth potential right now.

 

Unless we see big changes in the metals markets, we will not be adding to gold or other precious metal positions at this time, but we probably won't sell them at a loss either, unless it is advantageous for tax purposes. I'm not going to call a bottom, but I don't think the sellers are finished with gold and silver yet.

 

Lastly, we are not seeing the "great rotation" out of bonds. Bond fund prices continue to rise and low volume in overbought stocks makes them look far riskier. We will continue buying risk-appropriate, tax-sensible sources of income in individual bonds, bond funds, and other dividend-yielding securities.

 

Bull markets climb a wall of worry and the higher they climb; the easier it is to find analysts and pundits who say they're going to fall. From presidential election cycles to Super Bowl winners, folks look for anything to predict market direction, and some are right, occasionally.

 

The weirdest market predictor to catch my eye is the 17-year cicada. Yes, the large insects which appear every 17 years. As it turns out, since 1928, markets have returned an average of 21% during years in which the critters appeared. That's almost twice the historical, annual averages. But beware! S&P's market guru Howard Silverblatt sums it up best with this warning. "You can prove anything you want. Start with your answer, and I have the data to prove it."

 

Please call or email if you have any questions or want to talk. Enjoy the longer, warmer days and we'll do this again in about a month.