This week we saw a lot of economic data and company news that has resulted in a positive market for the week. But we must also keep economic data and capital market activity in the proper context. For example, Canadian investors have seen our markets appreciate approximately 6% year to date, however they are still below where they were in December 2007.
The economic data that we have seen this week has been quite positive and further strengthens our conviction that the US economy is continuing to recover. Continued gains in employment have lifted consumer confidence, giving households the ability to spend after unusually harsh winter weather. Companies from Apple to Whirlpool are optimistic that stronger growth will continue to boost sales over the remainder of the year.
Whirlpool reported their first quarter sales that were ahead of analyst expectation and points to expected continued growth in the U.S. housing sector. As Marc Bitzer, president of North American operations at Benton Harbor put it, “increased demand related to the replacement cycle of appliances and significant improvement in discretionary demand that we are currently seeing improving.” The Federal Open Market Committee (FOMC) in their meeting minutes released this week re-iterated that point in saying “Growth in economic activity has picked up recently, household spending appears to be rising more quickly.”
Another report from the Commerce Department showed personal spending in March increased by the most since April 2009, spurred by utility outlays, spending on durable goods and healthcare. Disposable income rose last quarter, the savings rate remains positive and wages and salaries have also increased 0.6 percent thus far in 2014. These are all strong points that underpin our belief that the longer term economic situation continues to show growth.
Gross Domestic Product (GDP) however only grew at a 0.1 percent annualized rate during the first quarter this year, compared with a 2.6 percent gain in the previous quarter. So while we continue to see economic expansion, we will continue to get economic data that is a little bumpy and it is this bumpiness that gives direction to the capital markets and the sentiment that drives them.
As many people know, one of the oldest adages in investing is “sell in May and go away”. When you look at the general markets over a long period of time, you do tend to see a pattern of flatter markets in the May through August time frames. However this does not mean that investors should do nothing during that period of time.
In a conference call this morning with our U.S. Strategist, Tony Dwyer, we were reminded that while the underlying economic data and market momentum are intact to the upside, it does not preclude that we could see some short term softness in the American markets. We were also reminded that we are approximately one year away from the expected increase in interest rates from the US Federal Reserve.
So how do we balance this information in order to maintain portfolio growth on behalf of clients?
During the same conference call this morning it was also discussed that the current capital market and economic environment looks very similar to 1995 and 2004. Periods in time when a value investment style, led by the energy, information technology and financial sectors did quite well, with telecommunications and consumer staple sectors lagging in overall market performance.
We agree with our US Strategist and many of our readers may have noticed recently that we have been recommending taking profits in companies like Telus and holding a bit more in cash balances at the present time. It is also our opinion that we will have an opportunity to put the cash balances we have recently accumulated back to work as some seasonal market softness is expected.
To end off this week, we thought a little bit of trivial pusuit type info fit the bill. The phrase “sell in May and go away” was an actual banking practice that took place in the United States decades ago. Historically the United States had a very fragmented banking system, thus every spring when farmers required loans to buy seed the local community or regional bank had to make credit calls to the larger commercial banks, who in turn sold equity holdings in order to advance those loans. Thus like clockwork larger US bank would begin selling their equity holdings to provide farmers with loans every spring. Those short term loans were then repaid after harvest, i.e. October and the banks would put those funds back into the capital markets. The result was a very predictable pattern of selling equity in May and buying back that equity in October.
While this pattern no longer dominates the banking industry it still does have some seasonal relevance, and one that we believe gives opportunity to periodically buy when others are fearful.
Have a great weekend.
Thank you for your trust.
As always, we welcome any feedback.
The Dekker Hewett Group