Stock markets seem to be running out of steam this month after what was a spectacular first quarter for them.
US stocks have been rallying for six months, but the Dow Jones Industrial Average and S&P 500 have both shed 2.7 per cent in the first two weeks of April despite first-quarter gains of eight and 12 per cent, respectively.
That pattern is pretty consistent across the globe, with Japan’s Nikkei 225 index giving back 4.4 per cent of its 19.3 per cent first-quarter jump, Germany’s DAX retreating 5.2 per cent after a 16.6 per cent rise, and India’s Bombay Sensex losing 1.8 per cent of its 10.4 per cent advance.
There is a famous market mantra, “sell in May and go away”, as historically the worst six months of the year for the market tend to be May through October. Most of the profits are typically made between November and April.
The theory holds that most bonuses, a source of investment in the market, are paid in December and January. The summer months are generally a time for vacation, and investors tend to focus less on the market.
In 2010 and 2011, markets rallied early in the year, only to falter in the spring. Summer saw deep drops, with sharp rebounds in autumn.
With the last two weeks being the worst stretch of the year so far, investor anxiety is growing about the possibility of a repeat performance.
The market concerns encompass issues both old and new. Europe’s debt crisis is persistently resurfacing.
Rather than Greece in the spotlight, all eyes are on Spain as yields on the country’s 10-year bonds hover around the critical six per cent level and the cost of insuring the country’s debt continues to hit daily records.
Rating Agency Moody’s appears set to downgrade its ratings on European banks, which will result in increased borrowing costs.
A string of tepid US economic reports revived doubt in the strength of the recovery. Less-than-expected US employment growth, a surprise dip in consumer sentiment and a drop in home-builder sentiment for the first time in seven months rattled markets.
Whether China will have a hard or soft landing remained a debate as its annual rate of economic growth slowed to 8.1 per cent in the first quarter from 8.9 per cent and inflation rose to 3.6 per cent in March from 3.1 per cent in February.
Oil remains over US$100 a barrel, Iran nuclear negotiations produce no solutions, and North Korea stubbornly launches meaningless missiles.
No one is expecting a crash, but a drop of more than 10 per cent in the markets, a correction or pullback is highly likely.
A correction is a market decline of 10 per cent or less in a short period of time. A pullback occurs when the market breaks out of a large upward trend and dips four to seven per cent.
As markets don’t go up in straight lines, pullbacks are viewed as a healthy adjustment to overbought conditions.
Pullbacks are generally considered buying opportunities.
While US and Chinese growth have slowed, the world’s two largest economies are still expanding nicely. Europe seems to have the willpower to sequentially handle its problems country by country.
Presently, there is nothing out there that is a deal-breaker to upset the long-term bullish trend upwards.
Anthony Galliano is the chief executive of Cambodian Investment Management.