Hard to make hay on market in May
May is historically a tough month for investors and this has proved the case yet again in 2011 with the ASX 200 index down 2.4 per cent for the month, and 8 per cent since the most recent peak on April 12.
Each year, there is a different trigger that drives the market.
It was the Resources Super Profits Tax in 2010. In 2011, you can look at either the European sovereign debt issues or the slowing of growth in the US economy — both are pushing the market in the same direction. So what is going on?
Starting with European sovereign debt issues, everyone has heard of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and their debt issues that have been overhanging the market for some time now.
Taking it a step further, Greece is technically insolvent and the remainder of the PIIGS can’t be all that far behind.
This week, European leaders are meeting to consider whether Greece should get a second bail out. Greece received a 110 billion euro aid package 12 months ago, now Europe is considering another 50 to 60 billion euro package on top of that.
And when I say Europe, it is really Germany and France that are stumping up the cash to keep the ideology of a single currency across Europe alive. Germany and France are doing this because the simple reality is they are too far invested into the concept not to, and the consequences should the European Union fail are horrendous.
The second trigger that has gripped the markets over the past two months is the slowing US economy.
The US is quickly approaching the end of its second stimulus package (QE2), scheduled to conclude at the end of June. These two US stimulus packages alone have kept the country afloat post the GFC, however, as this stimulus is approaching the end of its run we have seen US housing prices start to fall again and jobs growth start to slow.
This leaves the unemployment rate in the US about the 9 per cent range at the end of two of the largest stimulus packages in history.
If the Government artificially pumping cash into the economy can’t kick-start it, then I’m not sure what can in the short-term.
This now leaves the US government in the unenviable position of deciding whether to launch a third stimulus package (QE3), and hence compound their debt issues even further, or let the natural market forces of supply and demand take hold, which could easily see the US economy double dip.
These issues are having a marked effect on the Australian market. It’s at this point you need to know whether you are a trader or an investor.
If you’re a trader, then it’s been a bleak two months with the spec market going to sleep on light volume and only rare movements seen in those companies lucky enough to strike new deposits.
If you’re an investor who sees themselves as contrarian, then you’d be scanning the top 20 companies looking for stocks trading close to the bottom of their recent trading ranges, and getting yourself set for the upcoming August dividend period.
The market moves in ebbs and flows, and recently the tide has been heading out.
But the uncertainty surrounding Europe and the US will sort itself out in due course.
''Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.
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