Stocks: Here's What to Expect in June

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Before we get to the outlook for stocks in June, let's consider the road May took to bring us here. This year, the "sell in May, and go away" rule was good advice -- assuming you sold at the beginning of the month. Despite achieving a three-year high in May, stocks put up four consecutive losing weeks, which we've not seen since February 2010. Furthermore, it was only on the last day of the month that stocks managed to register a 1% gain, narrowly averting the comparison with May 2007, when the index was at 1,531.

Expect higher volatility
As we begin June, the VIX index remains near the 52-week low achieved in April. Wall Street's "fear gauge," which measures the prices investors are willing to pay for protection for their portfolios, closed at 15.45 yesterday (substantially below its historical average.) This indicates that investors expect low volatility in June, and after all, the summer has begun. As bankers and traders retire to the Hamptons, one would normally expect lower activity and less volatility.

That's the rub -- things are anything but normal this summer. In fact, between the latest manifestation of the European sovereign debt crisis and justified concerns about the slowdown in the U.S. economic recovery, things look very reminiscent of last year. Back then, a correction that had already begun in May continued through June. I'm not predicting a correction -- although we are due -- but I think investors should be prepared for higher volatility than we have experienced recently. There is certainly no shortage of potentially disruptive events.

Waving farewell to QE2
For one thing, June is the final month of the Federal Reserve's second round of quantitative easing, which had the central bank buying government bonds in massive quantities to lower interest rates and inject funds into the banking system. Absent this buyer, it's a bit of a mystery where benchmark government bond yields will end up.

Greece: The sequel
Across the Atlantic, Greece is due to receive the fifth tranche of the original $110 billion European Union/International Monetary Fund bailout this month. However, the IMF has said that it will withhold its payment unless it receives assurances from the European Union that it will cover Greece's funding needs in 2012 (the original plan, going back to the market, went out of the window). Did I mention the growing rift between the European Union and the European Central Bank regarding the restructuring of Greek debt? The former is beginning to consider this option, while the latter is staunchly opposed to any restructuring.

Given the different interests at stake and the cacophony of voices pitching in on the matter, there is more than enough tinder for surprises and wide swings in market sentiment, particularly with Eurocrats on the job -- they never miss an opportunity to mismanage the market's expectations. If you think U.S. stocks are insulated from the fallout of this European carnival, I refer you back to 2010.

Increased market volatility contributes to the second trend I'm looking for in June:

 Defensives over cyclicals
The rotation from cyclical stocks into defensive names began in April, continued in May, and I expect it to continue in this month. As more confirming data come in, the market will take the full measure of the economic slowdown. Once investors realize the economy isn't following the script of a normal recovery, they will continue to reallocate away from cyclical sectors into "safe haven" sectors that offer less exposure to the economic cycle: consumer staples, health care, telecoms, and utilities. Meanwhile, expect financials, industrials, consumer discretionary, and financials to bring up the rear.

Energy and technology
What about energy and information technology, you ask? Energy is a tough one to categorize because the companies are so dependent on commodity prices. In this environment, who knows what those prices will do in any given month? Technology companies are dependent on the business cycle, but some of the largest weightings in the sector belong to stocks that already look very cheap. The following table shows the 10 largest technology stocks in the S&P 500, along with the stocks' forward price-to-earnings multiple and the same multiple once you subtract the company's net cash per share out of the stock price:


P/E (on next 12 months' earnings)

P/E (adjusted for net cash position)

Cisco Systems (Nasdaq: CSCO  ) 10.0 7.3
Microsoft 9.3 7.8
Intel (Nasdaq: INTC  ) 9.7 9.1
Apple (Nasdaq: AAPL  ) 12.9 12.1
Oracle (Nasdaq: ORCL  ) 14.6 13.9
Google 14.9 12.3
Qualcomm (Nasdaq: QCOM  ) 18.3 16.5
EMC (NYSE: EMC  ) 18.4 17.8
International Business Machines 12.5 N/A
Hewlett-Packard (NYSE: HPQ  ) 7.4 N/A

Source: Capital IQ, a division of Standard & Poor's.

Microsoft shares changing hands at less than eight times earnings? Is the Ballmer discount really that large? My sense is that many of the stocks in the table are already close to a floor set by value-oriented investors, who will step in to buy shares when valuations become irresistible. For example, David Einhorn of Greenlight Capital -- a high-profile value investor -- touted Microsoft at last week's Ira Sohn conference. Cynics will say it's simply a case of putting his mouth where his money is; Greenlight already owns 9.1 million shares of Microsoft.

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Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of EMC, Oracle, Qualcomm, Apple, Google, International Business Machines, and Microsoft. The Fool has created a bull call spread position on Cisco Systems. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Google, Microsoft, Cisco Systems, Intel, and Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (14) | Recommend This Article (51)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 01, 2011, at 5:14 PM, prginww wrote:

    The man backed out the cash! Great article - wish I could read one this good every day.

  • Report this Comment On June 01, 2011, at 5:17 PM, prginww wrote:

    Thanks, ikkyu. I keep hearing about these cash-rich tech giants; I was curious how the cash position impacts the valuation.

    Of course, that doesn't preclude the companies doing stupid things with that cash (see Microsoft's acquisition of Skype, for example.)

    Alex Dumortier

  • Report this Comment On June 01, 2011, at 5:19 PM, prginww wrote:

    While I have your attention, Alex, I hit 'click here' in the disclosure statement to see your holdings, but I don't see where they're listed. Do you have any personal holdings, or are they all in with Marathon Investments - and does the Fool's disclosure policy extend to investment firms that employ their authors?

    Not meaning to be prickly, just curious: I've long been respectful of TMF's disclosure policy which is one of my favorite things about the site.

  • Report this Comment On June 01, 2011, at 5:50 PM, prginww wrote:

    I currently have no personal holdings in stocks whatsoever, if we except those in mutual funds in my 401k.

  • Report this Comment On June 01, 2011, at 5:55 PM, prginww wrote:

    GOOG hasn't moved in a while so i Hope you're right. Also got some QCOM.

    Your tech list is basically 50% of QQQ. Lots of good value there between growth stocks like AAPL and old tech giant values like INTC and MSFT. I loaded up on some today.

  • Report this Comment On June 01, 2011, at 6:39 PM, prginww wrote:

    TIME FOR OBAMA TO GO! the american economy is in a state of collapse.this is getting worse than the financial meltdown.the american people need to step in remove obama from office and move the presidental election up to this fall otherwise the country will collapse

  • Report this Comment On June 01, 2011, at 8:24 PM, prginww wrote:

    @plange01: this has nothing to do with Obama, and all to do with the previous administration. Many of us would be living on the streets if it wasn't for what Obama and his administration did to rescue the economy.

  • Report this Comment On June 01, 2011, at 9:09 PM, prginww wrote:

    "How can you be so obtuse?"

  • Report this Comment On June 01, 2011, at 9:11 PM, prginww wrote:

    Well-written article, Alex.

    In response to you comments with ikkyu2, may I ask why you are not in stocks period? (I understand if you would choose not to answer here.) You are one of the authors I regard most highly as having a grasp of the world of economics... and it surprises me that you do are not directly using that knowledge to your advantage... unless you are simply waiting on the sidelines for now since things are indeed overpriced. If prices plummeted would you jump in?

  • Report this Comment On June 01, 2011, at 9:47 PM, prginww wrote:

    While the net cash position discussion is interesting, there's always this necessary caveat. Most the cash is held overseas, and barring a tax holiday, subject to major taxation if they ever want to bring it back.

    That might sound like a minor point, but it's actually quite large. Take Cisco... $43 billion in total cash (I think only 3 billion is in the US), taxing all the foreign held cash at 35% (and giving them full credit for the $3 billion onshore) means their cash position goes down to $29 billion. Measure that up against their $17 billion in debt and their net cash position fades from around $27 billion to $12 billion. A $15 billion dollar gap is often the amount a valuation model of a company might find them "undervalued" by... This is by no means trivial.

    Then there's the added fact that because of this (possibly unfortunate) tax situation they'll wildly spend or invest overseas - see Microsoft and Skype.

    For some companies its all smoke and mirrors. Just a little buyers beware on netting out the cash.


  • Report this Comment On June 01, 2011, at 11:23 PM, prginww wrote:

    After the market goes down 4% in a month you are telling people to get into defensive stocks. Too late my friend. I told them to get out before the market cratered with my "random luck". You are like most analysts, meaning that after the bad news comes you tell them to get out of a stock or sector.

  • Report this Comment On June 02, 2011, at 12:30 AM, prginww wrote:


    Point taken. That's certainly something worth considering.

  • Report this Comment On June 02, 2011, at 8:58 AM, prginww wrote:

    As I look at my own portfolio, 40% of it made a 52 week high over the last thirty days. McDonald's closed at an all time high less than ten days ago while Pfizer closed at a 52 week as of May 31st.

    Fifty two weeks ago, Pfizer stock was literally being given away, with no takers. Since then this particular stock has skyrocketed by more than 40% in total return. I know, because I was buying as much of it as I could afford.

    Thus, truth be told, this "sell in May and go away" nonsense is horrendous advice. For no reasonably intelligent investor in his right mind values someone else's opinion over his own.

    At the end of the day it is a "market of stocks", just as your grocery store is a market of food. If you cannot find anything on sale, than it is you who is the patsy, not the "market."

  • Report this Comment On June 02, 2011, at 5:34 PM, prginww wrote:

    <<Thus, truth be told, this "sell in May and go away" nonsense is horrendous advice. For no reasonably intelligent investor in his right mind values someone else's opinion over his own.>>

    Perhaps it wasn't clear, but I only referred to that old market saw as a way to introduce a comment on what stocks did during the month.

    I am in complete agreement with you that acting on this type of market 'wisdom' would be utterly nonsensical. Who in their right mind would liquidate their portfolio on that basis?

    Alex Dumortier

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