Investors Have Reason for Caution but Not Panic

The economic numbers reported around the world during the last few weeks have given investors reason for caution but not for panic.

A key concern is economic growth in Asia, which has special importance since it possibly has been the strongest part of the world’s growth lately. A slowdown in China’s economic growth is a reason for concern among investors, along with questions about whether the predictions by some observers that current economic doldrums in Europe could linger for years.

China’s service sector growth slowed in April to its lowest point since August 2011 to give a clear sign that the world’s second-biggest economy may not provide the buying stimulus that many observers are looking for to propel global economic growth. Specifically, the HSBC services Purchasing Managers’ Index (PMI) for China fell in April to 51.1, down from March’s 54.3, with new order expansion slipping to its weakest mark in 20 months and staffing levels in the sector dipping for the first time since January 2009.

That cautionary report occurred as a number of economists warn that easy-money policies around the world are creating an artificial bubble that ultimately will burst. Central banks in the United States, Europe, Asia and Latin America have reduced interest rates to or near record lows. Indeed, scant room exists to cut rates much further and that policy is giving an artificial boost to the valuations of other assets.

Even though an often repeated Wall Street saw, “Sell in May and go away,” has proven to be an accurate indicator of the market’s direction during the past few years, investors currently seem willing to brave the risk as equities in the United States, emerging markets and elsewhere have risen in recent weeks.

Further reason for investors to stay optimistic comes in the form of today’s report that the United States posted its widest budget surplus in five years during April, fueled by stronger individual and corporate income-tax receipts. Even though the U.S. government continues to amass huge deficits that have topped $1 trillion in each of the past four years, the surplus for April increased to $112.9 billion, the biggest since April 2008, compared to $59.1 billion for April 2012, the Treasury reported today. The median forecast of 24 economists polled in a Bloomberg survey called for an April surplus of $112 billion, slightly below the actual number.

Another positive indicator is that nonfarm payroll employment rose by 165,000 in April, but the unemployment rate held steady at 7.5 percent, the U.S. Bureau of Labor Statistics reported on May 3. The 7.5-percent unemployment rate, however, has fallen by 0.4 percentage points since January. April’s 11.7-million unemployed was little changed during the month, but unemployment has decreased by 673,000 since January.

Finance Professor Jeremy Siegel, of the University of Pennsylvania’s Wharton School, told Bloomberg on May 6 that Fed’s easy-money policy will keep interest rates low and lure investment dollars into equities through the end of the year, when he predicted the Dow Jones Industrial Average could reach 16,000 to 17,000 from its current record level of 15,000. He also cautioned that the bond market has been in a bubble for the last two years that is destined to burst.

Triggers for the bond bubble to end could be a string of positive U.S. job reports during the second half of this year or increased talk that the Federal Reserve will curtail its easy-money policies, Siegel said. He also predicted 3.5-4% U.S. gross domestic product (GDP) growth this year.

However, investors should expect no economic impetus from Europe anytime soon. European purchasing managers indexes (PMIs) showed earlier this month that the euro zone is enduring a deepened downturn in the current quarter. Germany, traditionally Western Europe’s strongest economy, is incurring a contraction in business activity that is preventing it from lifting the shrinking economies in France, Italy and Spain.

With the month of May now one-third complete, it will be well worth watching whether 2013 will be an exception to the rule of selling in May or usher in a late-arriving traditional summer swoon. For now, a stock market crash free fall seems cushioned by the easy-money policies of central banks that give investors few other places to find heightened returns.

Paul Dykewicz is a seasoned journalist who is the editor of Eagle Daily Investor and the editorial director of the Financial Publications Group at Eagle Publishing in Washington, D.C.