Sell in May and Go Away? It’s
Certainly Looking That Way

financial crisisThe current stock market correction has some legs, so be prepared for more downside. We’ve got gold below $1,600 an ounce and oil solidly below $100.00 a barrel—this is a broad-based market correction in investable assets and it will likely linger for a while.

The stock market began to roll over naturally after the majority of first-quarter earnings were reported. We were due for a market correction just based on the market’s strong performance from the beginning of the year. Then, the most recent catalyst was the political uncertainty in the eurozone and the continuing worries regarding European sovereign debt. The timing could not have been more perfect. Going forward, I wouldn’t be surprised at all if stock market trading action is difficult right until the end of the summer. Then, it’s election fever. The old adage, “Sell in May and go away,” looks like a winner this year.

In terms of investment strategy, now isn’t the time to be a buyer. I think stock market investors should wait for the current market correction to play itself out, while watching for good corporate news and dividend increases. The spot price of gold is also in correction mode and could be soft for the next couple of quarters, perhaps even into next year. For stock market speculators, I continue, however, to like mining stocks. For the majority of an equity portfolio, higher dividend paying stocks are the only way to go in a slow growth environment.

Investor sentiment isn’t all that bad at this time. The stock market needed a market correction and is gyrating on Europe, but the domestic outlook is still decent and stocks are not expensive. Some industries are doing much better than others, but this is the nature of economic recovery. It takes a lot of time for the system to balance itself out after the mortgage debt-induced financial crisis.

So, if you’re a stock market investor, you need a lot of patience. Most U.S. corporations said in their first-quarter financial reports that they expect business to get better in the bottom half of the year. The fundamentals, in terms of valuations and corporate earnings, are actually pretty decent for the stock market. But, the marketplace is now in fear mode and the biggest problem is all the uncertainty. We’ll see how long this market correction lasts. Anything is possible these days.

I would add that the gift of a material price correction is the opportunity to invest in good companies at a more attractive price. Equally important is the falling price for oil, which has an almost immediate impact on disposable income and corporate earnings. The financial world isn’t coming to an end (at least not quite yet); it’s only going through a well-deserved market correction. There is an underlying strength to the stock market and that’s because of valuations. (See The Best Performing Index Over the Last 12 Years.) Share prices could be soft for the next several months, so retail investors will likely keep to the sidelines. I expect institutional investors to keep buying higher dividend paying stocks throughout the year. I also expect increased dividend announcements right into 2013.