If one looks back over the last decade, April has been a good month for the stock markets. On average, the S&P 500 Index has risen almost 2% in April with the lion’s share of gains coming in the last two weeks of the month. Month to date, the S&P 500 Index is up 1.4%.
After December, April is the single best month of the year for stock market gains over seven of the last ten years. Granted, last year was a bit choppy, but it wasn’t until the onset of May that the markets declined with a vengeance. So far, the markets are behaving in line with those expectations.
May, for those who pay attention to such things, is a different kettle of fish. The old adage “sell in May and go away” has turned out to be sage advice the majority of the time. The saying has its origins in the fact that over a good number of years stock market returns have been higher in the winter months than in the summer months. So selling in the spring and buying back in the fall theoretically produces higher returns. Unfortunately, for investors it doesn’t work every year and you never know when you might be in one of those exception years.
Meanwhile, investors this week were focusing on a number of issues. The gold and silver prices, for example, plummeted along with many other commodities. Some pundits point to the reduction of risk in global markets as a possible reason for bullion’s demise. After several years of financial uncertainty, the horizon looks a lot less cloudy to many. They point to the gains in the stock market as proof that we are in a ‘risk-on’ rather than a ‘risk-off’ environment.
Many are also coming to the conclusion that, after years of purchasing gold and silver as a hedge against rising inflation (brought on by “our reckless expansion of the money supply”), inflation is at the same level or lower than when the Fed first adopted a quantitative easing strategy. They argue that interest rates should be rising, not falling, by now if there were any truth to this future inflation scenario.
The events in Japan are also attracting attention. The stimulus program the Japanese central bank announced last week has reverberated around the world. At 10.3 trillion yen ($116 billion), Japan’s quantitative easing program is double the size of the most optimistic forecasts. Japan’s QE have sent the Nikkei soaring (up 13% year-to-date), the yen plummeting (100 yen to the dollar) and rates on Japanese Government bonds (JBG) lower. Its impact on the rest of the world is only now beginning to be realized.
It could explain why, in the face of record highs in our stock market, U.S. Treasury bond prices have also climbed. They should be going the other way as investors sell bonds to buy stocks. But new buyers have suddenly appeared. Many suspect that Japanese insurance companies, who hold massive amounts of long-term Japanese debt, are selling their JGBs back to their government and replacing them with higher yielding, American government bonds.
If so, how meaningful is that fear, articulated by so many, that if our government debt keeps rising, there will be no country willing to buy our sovereign debt?
Another question worth asking is how will the revitalization of the world’s third largest economy impact global trade? Anyone’s best guess is that the effect will be positive but who will win and who will lose? For those interested in learning more about these developments, read my column this week “Japan: the Rising Sun.”
You can be sure that I will be monitoring developments in Japan in the future. As for our own markets, the melt-up continues. Enjoy it while it lasts.