Friends
May ended up being a very choppy month with a negative bias for the markets. We saw commodity prices fall drastically early in the month, but as the month came to a close, many commodity prices were climbing slowly higher. Stocks ended up down 1.4% for the S&P 500 but the volatility made it seems a whole lot worse. The leaders were defensive names in health care, consumer staples and utilities as economically sensitive stocks, such as energy, industrials and materials took a pounding.
On the surface it appears that stocks and bonds are telling two different stories. As bonds strengthened, with rates drifting lower, the interpretation would be that the economy is slowing. The litany of reports we have received over the past month seem to validate the move in bonds. Stock averages on the other hand have held up rather well considering the overall macro picture we are seeing. The ADP employment number was miserable this morning, and manufacturing, consumer confidence and housing numbers have also been awful. It sure appears that we are experiencing the dreaded double dip in the housing market and it just seems that it is going to take quite a bit of time to work through the problem. The underlying strength in “safe” stocks and the weakness in “economically sensitive” stocks seems to concur with the view of the bond market.
The bounce back in stocks the last few days masked what was really a difficult month for traders as the litany of negative economic news seems to be overwhelming the financial strength of many U. S. Corporations. Seasonally, this is typically a difficult time for stocks and this year seems to been holding true to form so far. It wasn’t exactly “sell in May and go away”, but there was quite of bit of weakness in many sectors. June is also known as a typically difficult month for stocks. Friday’s unemployment number may go a long way in setting the tone for the month.
The interesting question is, with all this economic weakness, what is the Fed likely to do? QE2 is scheduled to end this month, but with the economy showing signs of slowing again, can the Fed take the training wheels off the bicycle? More importantly is the Fed action having any effect on the mainstream economy at all, or has the effect simply been to move stock prices higher? Dr. Bernanke has some difficult decisions to make in the coming months.
We will see how the employment number affects the markets on Friday morning and check in with you then.
