As a kid, April was always a joyous time. There was the birthday and its associated presents in week one, which then gave way to baseball tryouts. Now, having found my first gray hair this past Monday (hey, it was emotional) and having compiled data from Aprils of yesteryear, I realize that the calendar turn has become rather depressing.
Over the next five days, you will bear witness to all sorts of slick-sounding strategist notes predicting an April calamity in the markets, using specific examples starting from April 2010. The evidence legitimately supports the case for lightening up on portfolio risk, as does a market that deserves a little steam release (Clorox (CLX), Tupperware (TUP) and Hershey (HSY) can't keep ripping to fresh 52-week highs, as these companies are not game-changers, just stable dividend payers).
What I want to convey, however, is that there will be differences between April 2013 and the Aprils of 2012, 2011 and 2010, and that ultimately a mega-retracement in stock prices is not a done deal. (Usually when you think something is a done deal in the markets, so does everyone else, and the opposite happens.) There is a better than 50% probability for a minor retracement that will act as a period of reflection on whether to enter the month of May boasting a spreading of sequester economic effects.
Two Consistent Demons of April
- Winning positions sold to satisfy the April 15 tax deadline.
- Corporate quiet periods ahead of earnings reports, leading to less factual information flow and more rampant speculation.
Running Down Depressing Aprils
- Major indices' performance for the month: Dow flat, S&P 500 -0.8%, Nasdaq -1.5%, following strong gains in each in the month prior.
- S&P 500 peak: April 2, 2012.
- Worries circulating in the markets: A deceleration of China's economic growth (which caused negative sales surprises for multinationals), pre-Draghi promises driving uncertainty on the euro zone staying intact, election season politics, earnings estimates falling because of a slowing global macro environment.
- Specific event that shifted the investing backdrop in my view came on April 3, 2012, with the Fed minutes: "Prepared to adjust the size and composition of securities holdings as appropriate."
I continue to believe Fed Chairman Bernanke altered his stance on the pace of quantitative easing during the most recent press conference (he acknowledged that "meaningful" improvement in labor market conditions, instead of "substantial" improvement, was needed before the Fed would consider a shift in the amount of monthly securities purchased). So, rather creepily, this places the next Fed minutes squarely in focus as a rally killer, circa 2012.
By the way, one difference between now and a year ago is that earnings estimates are not dropping materially, probably on expectations for healthy utilization of newly enacted share-buyback plans and tame input costs. Therefore, this reduces the risk of earnings letdowns, though intense multiple expansion may turn quality reports into sell-the-news events.
- S&P 500 peak: April 29, 2011.
- Negative events: S&P slashed U.S. debt outlook, rising fears on the extension of Operation Twist (which was extended in June), the Japan earthquake and tsunami, Arab uprising, inflation.
- S&P 500 peak: April 23, 2010.
- Negative events: Dodd-Frank, no stability in the European Union's financial markets and, by extension, its economies.
- Housing is quite supportive, a major difference in relation to 2012, 2011 and 2010.
- Employment growth does appear to be at a sustainable post-recovery pace and accelerating (housing and manufacturing momentum helps to sustain it ), a difference in relation to 2012, 2011 and 2010.
- The Volatility Index (VIX) is absurdly low, a similarity to 2012, 2011 and 2010.