Can You Make Money in the Current Environment?
May 30, 2018, 10:26 am
The old adage “sell in May and go away” didn’t really apply until the very end of the month as the strong first-quarter earnings season was more than able to offset the rise in the 10-year Treasury yield above 3%. This is a big deal because the similar rise back in February cracked the market, so it was very good to see stocks brush off the move this time.
However, Italy’s 10-year bond is starting to get more attention, with its yield flying from 1.79% at the start of the month to 3.16% yesterday. The new Italian government’s ambitious tax cut and spending plans, along with the potential end of quantitative easing (QE) in the European Union (EU), have helped drive the higher yields. The absolute levels remain very low, lower than the U.S. 10-year Treasury yield and not even close to the 8% yields Italian bonds touched in 2011; however, it is the rapid rate of change that has some investors on alert since the rout in stocks that occurred back in the summer in 2011 is far from forgotten.
The good news is that there are a few balls in the market’s court that could limit the selling over the near term. First, there is no sign of contagion within the eurozone right now. While Spanish yields have also risen, they remain very low at 1.62%. Second, U.S. 10-year Treasury yields have fallen comfortably below 3% in a flight to safety. Given the turmoil, there is also a chance that both the Federal Reserve and European Central Bank (ECB) will take more dovish stances, opening the door for the ECB to extend its quantitative easing program.
Third, the NASDAQ is providing good leadership, and we saw that again yesterday as it hung in better than the S&P 500 and Dow. And finally, we are just a little over a month away from the next earnings cycle, and the issues surrounding Italy should not have a negative impact on the current quarter’s results, so it is hard to get too bearish in front of what should be another strong earnings season.
While we could be in for a bit more selling, I don’t expect the S&P to drop below 2,600 in front of the coming cycle unless there’s more bad news on the macro front, like a rise in the Spanish bond yields above 2%. (Yes, Italy’s situation has us back to monitoring Spain’s bond yields as well.)
In the meantime, one way to keep making money in the current market is through names that are not highly cyclical, have stable operations and pay healthy dividends or are buying back stock. These are the companies that do better in difficult environments, which we could see again before year-end given the many crosscurrents Wall Street has to contend with right now.