IT’S understandable if the month of May fills investors with trepidation.
After all, almost a year ago, equities entered a near-bear market that pushed stocks lower by more than 19 percent. That came after a very promising start to the year, a pattern that also occurred in 2010. And this year through April, the Standard & Poor’s 500-stock index returned nearly 12 percent.
Will economic worries in May dash early signs of optimism once again this year?
Michael J. Cuggino, president of the Permanent Portfolio Family of Funds, sees some disturbing parallels. This winter, he said, “you had the feeling that, ‘Boy, we’re finally out of the woods.’ Then all of a sudden you start seeing softer economic signs.”
Those include yet another round of worries coming out of Europe — including Spain’s fiscal crisis and news that Britain has slipped back into recession — along with high oil prices and a still-weak labor market at home. In April, there was a net gain of only 115,000 jobs, much less than had been forecast.
Yet many strategists say enough has changed that another severe pullback isn’t a fait accompli. “From a fundamental perspective, there are quite a number of differences,” said Brad Sorensen, director of market and sector analysis at the Schwab Center for Financial Research.
Take gas prices. In the first four months of last year, domestic equities began to sink in May as prices at the pump soared, weighing down the already hard-pressed consumer. At the start of May 2011, a gallon of regular unleaded gasoline averaged $3.96, according to the Energy Information Administration. That was up 37 percent from the same time in 2010. So far this year, gas remains uncomfortably high, but at $3.83 a gallon on average, fuel is actually cheaper than it was a year ago.
This is a critical point. An analysis by Ned Davis Research shows that the rate of change in gas prices is an important influence on the attitudes of stock investors. Researchers there found that only when prices at the pump jump more than 30 percent over 12 months do equities tend to lose ground. And when fuel prices have fallen over a one-year period, the S.& P. 500 has averaged gains of 12.8 percent.
Mr. Sorensen adds that there’s another big difference this year. Though oil prices are up since Jan. 1, prices for many other commodities are not. Since the end of last year, corn prices have been about flat, wheat has fallen slightly and natural gas has sunk more than 23 percent.
Why is this important? In 2011, global fears over inflation, especially surrounding elevated food costs in the emerging markets, led central banks around the world to raise interest rates. This year, policy makers in many of those same places — including China and India, and even Europe, at the European Central Bank — have been lowering rates to jump-start growth. Just last week, the Reserve Bank of Australia slashed rates by half a percentage point, citing a weak economy and mild inflationary pressures.
“This substantially changes the picture from the past couple of years,” Mr. Sorensen said.
Jeffrey N. Kleintop, chief market strategist for LPL Financial, said central bank rate cuts “should help to temper global recession fears evident during the past two years’ spring slides.”
To be sure, with 10-year Treasuries yielding a scant 1.88 percent today, down from 3.29 percent a year ago and 3.7 percent in May 2010, the bond market could be signaling that the economy remains troubled. But James W. Paulsen, chief investment strategist at Wells Capital management, notes that the byproduct of those low yields — falling borrowing rates — is helping consumers in the short run.
He points out, for instance, that in May 2011 and May 2010, rates on the average 30-year fixed mortgage were around 5 percent. Today, they’re below 4 percent, which should spur refinancing. Moreover, the household debt service ratio, which measures debt payments as a percentage of disposable personal income, keeps falling. According to the Federal Reserve, debt payments represented about 13.4 percent of disposable income in early 2009. That fell to 12.3 percent in the first quarter of 2010, 11.2 percent in early 2011, and to 10.9 percent at the end of last year.
Meanwhile, the corporate earnings picture looks much brighter than it did as recently as a month ago. In April, Wall Street analysts were forecasting flat profit growth of less than 1 percent for companies in the S.& P. 500 in the first quarter. But with around 85percent of those companies having reported their results, consensus forecasts for earnings growth have been ratcheted up to 7.2 percent.
Finally, there’s one other factor that could buoy the markets in the spring and summer. Brian D. Singer, head of global macro strategies at William Blair, points out that in 2010, the threat of the potential expiration of the so-called Bush tax cuts at the end of that year might have accelerated business activity that would have normally come in 2011. That may have further weakened the economy last year, he said.
With those same tax cuts again set to expire at the end of this year, this could again accelerate business activity from 2013 into this year, Mr. Singer says, bolstering the 2012 economy. He said this is one more reason for thinking that “there are more differences than similarities between this year and 2011.”
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
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