Time to Sell Everything and Go On Vacation for 6 Months?
This headline on Bloomberg.com caught my eye yesterday:
Not quite as succinct as "Sell in May and Go Away," but the picture of St. Lucia certainly helped grab my attention. The economist quoted is Steen Jakobsen, chief economist at Saxo Bank in Denmark. He has a bit more credibility than the average economist these days, thanks to his well-timed prediction that oil prices would drop below $80 a barrel last year. They're now below $50.
Today he's predicting that volatility and downside will define the next six months of stock market action.
In Mr. Jakobsen's own words, "If nothing else, reduce your stock portfolio to where it was on the first of January last year, put the money into cash and take a nice long summer holiday. You won't make any money, but you lose all the downside risk."
The risk he's predicting is based on four primary arguments:
- The Fed will raise U.S. interest rates soon
- Economic growth in the U.S. and China is slowing
- Stock markets are overvalued, and
- Central banks are running out of ammo to support them
His argument about slowing economic growth got a little boost yesterday, after ADP released weaker-than-expected payroll data for March and the ISM survey showed slowing growth at factories. This Friday's jobs report could easily add more fuel to the fire.
Of course, the flip side of slower economic and job growth is that it will delay the Fed's interest rate hike. The Fed has made it very clear that a rate hike will come only when the data on employment, economic growth and inflation demand it, so a slowdown in growth in the next few months would mean no interest rate hike.
Still, I'm not an economist, and some of Mr. Jakobsen's other arguments are well reasoned. His prediction that lower Chinese economic growth will mean lower commodity prices is particularly convincing, since we've already seen evidence of that.
But that doesn't mean it's time to hold a fire sale and flee to the tropics. Low commodity prices benefit plenty of industries, and cheap gas doesn't seem to be going anywhere. So rather than throwing the baby out with the bathwater, this summer may be a good time to become more selective in your investing, avoiding what's not working-which might be commodities or utilities-and focusing on what is-whether that's consumer discretionary, tech or health care.
Plus, it's the rare every investor who can afford to, or wants to, sell all his stocks. My premium advisory, Cabot Dividend Investor, is for investors who rely on their portfolios for regular income. Not everything in our portfolio is downturn-proof, but collecting regular monthly or quarterly dividends from your investments can make it much easier-and more rewarding-to hold them through the market's occasional tantrums. You can still spend your whole summer in a hammock on the beach if you like, and the dividends will keep flowing into your account like clockwork.
By focusing on investments that reward you in good times and bad, you can rest easy, regardless of what the economists are saying.
So what might one of those investments look like today, with a potentially volatile summer around the corner?
One name that comes to mind is Costco (COST), one of our best-performing positions recently and a major beneficiary of low oil prices. The company's store-adjacent gas stations become more profitable when oil prices drop, and their value proposition does well in times of moderate economic growth. We've owned Costco since February 2014, giving us a 68% total return to date. Here's what I wrote about Costco in my latest Dividend Investor issue:
"Costco reported excellent second-quarter earnings this month, including 26% earnings growth. EPS of $1.35 soundly beat analysts' expectations of $1.18, although revenue of $27.45 billion fell slightly short of the consensus $27.65 billion prediction. Same-store sales rose 4% in the U.S. and 2% overall. Costco also announced that Visa and Citigroup will replace AmEx as its exclusive credit card partner. Costco is a Buy for dividend growth."
Costco is a Buy for now, and if you want continuing guidance on COST and other stocks that pay dividends year round-wherever you are-considering trying out Cabot Dividend Investor.
Chloe Lutts Jensen
Chief Analyst of Cabot Dividend Investor