The next six months will not be so generous to stockholders. I have taken some profits over the past two weeks, put some new short positions on and have turned cautious.
The rally won't survive April and there will be lower entry points to deploy new capital into the market in the near future.
Here's why I'm bearish:
- The Friday monthly jobs report was horrid. Not only did jobs come in way under expectations at 120,000, but labor participation dropped as did average weekly hours. It will be hard for the market to rally any further until the April jobs report in early May comes out and hopefully shows the March report was an outlier and not a reversal of three previous months of decent job growth.
- Government continues to cut jobs (another 1,000 were cut in March). Given local and state tax revenue came at the slowest pace of 2011 during the final quarter, I would not look for this trend to reverse in the near future.
- The first-quarter reporting season should show the slowest rate of operating earnings in three years. Only three of the 10 sectors in the S&P are expected to show earnings growth for the quarter (technology, industrials, consumer staples). It's hard to see multiple expansion happening with earnings growth slowing.
- The Federal Reserve's Operation Twist ends in June and investors may not like to be without the Fed's safety net for the first time since 2008. Unless the economy really tanks in the next two months, it is hard to imagine the Fed doing much as we go into a presidential election.
- Spanish debt yields just hit their highest level since January and worries about Europe are creeping back into the market again. Spain's unemployment is more than 23% now, the economy is contracting again and it is hard to imagine the country avoiding a death spiral like Greece. I believe this will be the major story of the summer.
- China has slowed recently and one could easily make a case that they have the mother of all property bubbles. More and more voices besides Jim Chanos are saying China could be heading for hard landing, including this former chief economist.
- Given the approaching Supreme Court decision on provisions of Obamacare and an election that is approaching a two-man race between Obama and Romney, the political acrimony between the two parties is likely to escalate from already high levels. The potential for remarks that could rattle the markets should increase as well.
- We are about to enter a historical weak period on the stock calendar. There is a reason the phrase "Sell in May and Go Away" is one of the most-known stock clichés.
- High gas prices are going to start to impact consumer spending now that winter is drawing to a close and the tailwind of low natural gas prices for heating recedes and driving season approaches. Retail jobs have declined for the last two monthly jobs reports (29,000 in February and 34,000 in March), which does not make sense given the large same-store sales increases during the first quarter of 2012 in the retail space.
- The Iran situation could escalate at any time. Any escalation could result in much higher oil prices as well as draw the whole Middle East region into conflict.