Q2 2007: What to expect
4-2-07: As we start the second quarter of 2007, it is important to recognize the second quarter has historically underperformed. The “Sell in May and go away” could very well happen again this year. With that in mind, we would like to remind everyone to ensure your portfolio is diversified. Do not make the mistake of “putting all your eggs in one basket”. Taking the passive approach during these uncertain times could end up costing you dearly.
In addition to this historic selling pressure in May, we are also facing a transitional phase in the economy. There is ample evidence to suggest we could be heading towards some rough times, which would further fuel the selling pressure. For instance, the housing market continues to head south. This will hurt consumer spending and confidence level moving forward. Geopolitical tensions are again causing energy prices to rise. Considering the economy is heavily tied to energy, expect the price of consumer goods to rise. If the situation continues, inflation will spike, which would then force the Feds to raise short term interest rates. If that happens, the stock market will tank.
Here are some strategies and stocks one might consider to help reduce risk:
During tough economic times, one proven method of risk reductions is to stick with large caps stock. These are the large companies that are known for being able to sustain bad economic times. A McDonald's (MCD) or a Wal-Mart (WMT) would be the classic stocks to consider. While these stocks will not make your wealthy over night, they do offer great dividends, which in tough times is better than losing money.
Stay away from the growth companies as they will likely take the biggest hit when the sell-off begins. These growth stocks are very much dependent on a strong economy; any sign of economic weakness will result is a harsh sell-off. Companies that are currently trading at a very high multiple (P/E) are the most vulnerable if the economy does move towards a recession. A lot of the technology companies fit this profile. Therefore, if you portfolio is tech heavy, it would prove prudent to reevaluate your positions.
Do keep a good percentage of your portfolio in cash. Having cash available to act upon when there are bargains is crucial. We anticipate there will be lots of obvious bargain if/when the panic selling begins. Moreover, if the interest rate is high, the interest earned from the over-night sweep on your brokerage account could end up making you more money that investing in stocks.
As always, we wish everyone the best and hope these articles provide some assistance in your investment matters.
