10 Reasons to Walk Away in May: Part 2

Yesterday, I gave you five reasons I think it's best to take your money and walk away in May. Macroeconomic weakness and history continue to serve up warning signs to investors -- if they're willing to listen, that is.

Today, I'm going to discuss my other five factors that have influenced me to holster my buying for the time being and simply walk away in May. (For reference, here are my first five reasons.)

6. Retail sales are weakening
Blaming the weather can only take you so far; for the retail sector, the buck stopped in April.

Retailers, for months, have benefited from significantly warmer-than-normal weather in parts of the United States and an early Easter holiday. Last year, retailers' earnings were slammed because of a particularly nasty winter that kept consumers holed up in their homes instead out shopping. This year, consumers have returned with a vengeance, but the comparisons these retailers are up against aren't really comparable with last year. Based on April's same-store-sales figures for some of the nation's largest retailers, we're finally beginning to see those expectations come back to Earth.

Macy's (NYSE: M  ) and Costco (Nasdaq: COST  ) both reported same-store-sale increases over the year-ago period of 1.2% and 4%. These figures, however, fell shy of Wall Street's expectations for 1.9% and 4.9% -- the second consecutive monthly shortfall for Costco, which has seen consumer transactions growth slowing. Weak retail figures are a warning shot from a retail sector that still isn't on stable footing yet.

7. Bank growth has stalled
The third round of stress tests conducted by the Federal Reserve went more smoothly than planned, with only four major banks, including Citigroup (NYSE: C  ) , failing the test and many banks coming out better capitalized than many had suspected.

But recent bank earnings reports have also shed light on another factor: While the financial sector largely led us out of our lows this year, they're also struggling to find avenues of growth. JPMorgan Chase (NYSE: JPM  ) was caught with its pants down last week after a derivatives trading unit lost the company $2 billion over a span of just six weeks. The derivatives were meant to act as a risk hedge against JPMorgan's own investments but actually wound up exacerbating its risks instead.

With numerous banks still facing mortgage-related lawsuits and litigation, and countless homeowners well behind on their payments, the sector is facing a huge void in terms of near-term growth opportunities.

8. Wage growth being outpaced by inflation
It isn't hard to understand why retail spending is challenged, or why home prices are weakening, or even why consumers are having a hard time keeping up with their mortgage payments when you realize that we're in an extended period of inflation levels outpacing U.S. wage growth.

Sources: Bureau of Labor Statistics, InflationData.com, author's calculations.

I can't emphasize enough that this poses a very, very big problem! If the cost of goods, including fuel, which does have a tendency to inflate prices higher, continues to outpace wage growth, it would be unlikely that we'd see any sustainable (key word there) increase in consumer spending. With the U.S. economy so brutally dependent on consumer spending to drive growth, it's no wonder the Federal Reserve is bent on bringing the inflation rate down to 2% -- a level that also happens to be the average wage growth witnessed over the past year. The two rates are converging, but not enough for my tastes.

9. Asia is slowing
GDP growth of 7.5% would be considered potentially the greatest boom in U.S. history. For China, it's a significant slowdown from the double-digit growth rate that its residents and the rest of the world have become accustomed to. With slowing growth confirmed by China's premier, Wen Jiabao, in March, the as of now unanswered question then becomes: Who will put the weight of the world on its shoulders if not China?

We're already beginning to see the negative effects of a Chinese slowdown affecting precious metals. Gold and silver are trading at multimonth lows, and the miners are finding themselves in even worse shape, since many were lagging in terms of performance to their underlying metal to begin with. In its latest report, Freeport-McMoRan Copper & Gold (NYSE: FCX  ) , China's largest supplier of copper, sold roughly 100 million fewer pounds of copper and more than 190,000 fewer ounces of gold than in the comparable quarter last year.

This story could be superimposed with just about any other metals company that supplies China with everything from precious metals to steel. The slowdown has been confirmed; now who's going to step up to fill China's void?

10. History tells us to walk away
To expound further on research by the Fool's Alex Dumortier, history has been a very good indicator of future results.

As Alex pointed out in his research, buy-and-hold investing outpaced a strategy that involved trying to time the market by selling in May and rebuying in October -- not by much, but enough to be statistically significant. However, his research also indicated that a strategy of purchasing in October and holding for seven months as opposed to purchasing in May and holding for months would have produced a 73-fold outperformance!

What we can infer from this, as an addendum to Alex's thesis, is that long-term investing does indeed produce better results, but avoiding making purchases in May could be another key factor to producing solid results. There's nothing that says you have to sell in May, but there is statistical evidence that buying in May has not produced as good of a return had you purchased later in the year, when the historical returns were higher.

My buying boycott
There you have it -- 10 reasons I'm too worried to put any money to work in this market at the moment. That doesn't mean there aren't great values or that I won't nibble here and there on some of my core investments, but let's be clear that I'm saving my cash for purchases later in the year, when some of these issues addressed here have been resolved.

Agree? Disagree? Tell me about it in the comments section below.

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Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Costco, Citigroup, JPMorgan Chase, and Freeport McMoRan Copper & Gold. Motley Fool newsletter services have recommended buying shares of Costco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy that has your best interests in mind.


Read/Post Comments (5) | Recommend This Article (2)

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 May 17, 2012, at 9:51 AM, JimWilliamsFool wrote:

    Fools,

    If you can't time the market, you can't sell in May and buy in November because that's timing the market, no? Past performance doesn't mean future repeat as we all know, but not buying in May may have some value. However, it all depends on price of target and earning outlook. For example, witness Value Line's weekly gainers/losers report.

    Best regards

  • Report this Comment On May 17, 2012, at 3:50 PM, allrightallready wrote:

    FCX's "last report" reflected an inability to deliver due to labor problems, did it not? A "slowdown" in China means 8% growth, does it not? Greece, with its sun and sand economy, is being blown way out of proportion.

    The only thing I know is that traders cannot make money unless prices fluctuate. Prices will not "fluctuate" unless we have a lot of "churning" articles.

    I am with Warren Buffett. Everything will work itself out; do not panic. Do not try to time the market.

  • Report this Comment On May 17, 2012, at 5:55 PM, DocMonsta wrote:

    By 'Walk away in May' are you saying you are selling off your investments? Or simply just not adding to your positions?

  • Report this Comment On May 17, 2012, at 8:56 PM, TMFUltraLong wrote:

    DocMonsta,

    I'm not selling any of my core positions. I'm merely not adding to anything in heavy doses. I've nibbled very lightly, but I'm saving my larger purchases for later in the year when some of these problems have cleared up.

    TMFUltraLong

  • Report this Comment On May 18, 2012, at 10:30 AM, CoyoteMoney wrote:

    As in inveterate bottom fisher, I rarely worry about what "the Market" is or is not doing. When the ebbing tide pulls all the boats down, I look for the best deals on solid companies and pick up the strongest of the cheap (or the cheapest of the strong).

    Foolish to the End

    CoyoteMoney

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