Markets seem to know when something is wrong, even when the problem hasn’t shown up yet in technical analysis. And while trite sayings are a poor method for investing, anyone who heeded the old saw “sell in May and walk away” saved themselves two weeks of losses on their stocks and a summer of dead money.
Stocks, like sharks, are dying if they’re not moving forward and this summer promises to be dead calm. What makes a flat stock market so dangerous is that losses tend to happen suddenly and steeply. If stocks are already flat when a low-probability event strikes, the fall-off can be far more serious, and the recovery slower. A becalmed stock market is primed for bad news to push it over the edge. Investors, already jittery, are simply waiting for the first whiff of bad news before stampeding for the exits.
Lack of Liquidity
Television commentator Jim Cramer points out that after a rally that gained back some ground lost during the first few weeks of 2016, continued gains could be constrained by a lack of liquidity. There simply isn’t enough money in the market right now to sustain higher prices. That means investors who need cash will opt to liquidate their stocks because those are the assets that are underperforming right now.
The Gap reported dismal sales numbers that were down year over year. Analysts are concerned that retail faces a challenging environment in the year ahead. At a time when employment is supposed to be rebounding, and wages are creeping up, retail should be thriving. Instead, consumers are putting a check on spending for no clear reason, a big red flag for the road ahead for stocks.
Speaking of low-probability events that nevertheless occur, with devastating results, a forest fire in Canada is threatening to take a million barrels a day in oil production offline. You’d think that with a global oil surplus that losing a million barrels a day in production wouldn’t be that big a deal. What most people don’t know is that Canada is the biggest oil supplier to the U.S. A sudden drop in imports from Canada might not mean much on the world oil market but it means a lot to both North American economies. It all depends on whether you’d like to see your gas money going to a friendly neighbor to the north or our neither-friend-nor-ally in the Middle East.
Despite Happy Talk, Jobs Figures Are Soft
The weak April jobs report concerned investors and it remains to be seen whether it was a fluke or indicative of a wider trend. Soft employment numbers could kick off a downward spiral that pushes down stock valuations across the board. Jobs numbers are one indicator of a sideways market. If we see layoffs increase, a market rout won’t be far behind.
We’ll know by next month if this is a normal retrenchment after a fast run-up, or the beginning of something more serious. But right now definitely isn’t a time to be adding to stocks. A better strategy during times like this is to use the lull in the market to catch up on your purchases of liquid hard assets like physical gold and silver. It’s also a good time to take a hard look at your retirement allocations and imagine what kind of shape you’ll be in if your stocks tank, again. If, as is likely, you find the hit would be unsustainable, this lull may also be the moment to get some of those assets in a safe haven.