After an upside move of historic proportions, the stock market tired as May drew to a close last week, as for the second week in a row, the major averages had the nerve to finish lower, with a dramatic downside selloff bringing the month to a conclusion.
The market ended the month with its worst day in a month and a half and the major indexes settled at two-and-a-half-week lows, before starting the new month of June with another move to the upside. This dramatic selloff does not take away from the fact that the market has now advanced for seven straight monthly gains (the longest such streak since September 2009) and for May the Dow rose by 1.9 percent, the S&P was ahead by 2.1 percent while the Nasdaq did the best with a 3.8 percent advance, just about the same as the Russell 2000 Index of small stocks.
The Dow has now risen in 17 of the past 20 months, which is the longest such streak going all the way back to 1951. It has now been 105 straight sessions that the Dow has gone without declining for three days in a row, which is a record. The S&P has now seen 135 straight days without a 5 percent decline; the last one of this magnitude or greater was the 7.7 percent setback from last September 14 to November 15. This has been the longest such streak, since there were 173 such days that ended on February 20, 2007. And in the meantime, the S&P has gained 25 percent since those November lows and the largest decline during this time was the 3.8 percent setback in the middle of April. So we can certainly say that the market’s advance this year has been one for the record books.
About last Friday’s selloff, over the years I have noticed a distinct tendency for stocks to decline on the last trading day of a month. In the five last trading days of the month so far in 2013, they have declined three times despite the fact that the major averages have been ahead every month this year. And even last year, when the major averages finished with gains in the 12 percent area, there were seven out of 12 last days of the month when they declined, so Friday’s selloff should not have come as too great of a shock. It was certainly testimony to the market’s resilience that after the miserable performance to end the month, things bounced right back on Monday to start the new month as the Dow ended with a triple-digit gain.
This ongoing steady performance of stocks does not mean that all areas of investment are doing well. For instance, U.S. Treasuries posted their largest monthly losses in more than two years, which pushed the yield on the 10-year note up to as high as 2.18 percent from as low as 1.63 percent earlier in the month.
Despite both the Bank of Japan and the E.C.B. stating that they would stick to their expansive monetary policies for as long as necessary, investors in this country have gotten all bent out of shape on concerns that the Federal Reserve could soon taper down its current $85 billion-a-month bond buying program.
As mentioned in last week’s column, the entire dynamic of the bond market changed two weeks ago when Fed Chairman Bernanke made contradictory statements as to the extent and duration of the current stimulus package. This uncertainty was compounded with the release of the minutes of the last F.O.M.C. meeting in which confusing projections about continuing the current level of stimulus were put forth as well.
And adding to the anxiety in investors’ minds are the additional contradictory statements emanating from various top Fed officials, some of whom have insisted that the current level of stimulus should come to an end as early as this month, while others say that economic conditions have not improved enough to warrant such a break from present policy.
And every day lately when economic reports come in better or worse than the case may be, investors have been using the old “bad news is good news” and “good news is bad news” syndromes to react one way or the other. For instance, last Thursday the market ended higher when it was reported that weekly jobless claims rose by more than expected, the latest revision of first-quarter G.D.P. came in lower than projections and April pending home sales rose by less than expected as well. This was a classic case of the “bad news is good news” pattern, as if things are not as rosy as had been thought, then this must mean that the Fed will keep its current stimulus programs in effect.
The complete opposite pattern took place on Friday, when it was reported that the May Chicago Purchasing Managers’ Survey rose by much more than expected and the final U. of Michigan Consumer Sentiment Survey rose to its highest level since July 2007. And for the “good news is bad news” followers, the market decided that the path of least resistance was now lower, because if things are improving, then this must mean that the Fed will take the punch bowl away sooner rather than later. And sure enough this neurotic pattern continued on Monday, when the May ISM Manufacturing Survey declined at the fastest pace in four years, the market took that bad news and ran with it to the upside because now the thinking was that if things are not so good once again, then the Fed will keep its current stimulus programs intact, and so it goes.
For better or worse, this is now going to be the pattern investors will have to deal with, and all of this will be the prelude to Friday’s May non-farm payroll report, which is estimated to show a gain of 165,000 positions, around the same as last month. So the question now becomes: Does an investor root for a report that shows more jobs than this were created, which would mean that the economy is getting better, or do they secretly hope for a lower level of job creation, which would now mean that Fed stimulus is going to be with us for the foreseeable future?
Donald Selkin is the Chief Market Strategist at National Securities in New York, a veteran in the securities industry for 36 years who is widely quoted in the financial media.
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