Analysts: Get Ready for Summer Stock Sell-off

Monday, 14 May 2012 07:31 AM

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First quarter earnings have surprised on the upside but earnings season is coming to an end, and with the European debt crisis getting worse and the outlook for the U.S. as cloudy as ever, investors need to prep for a summer sell-off, experts say.

In 2011, the Dow Jones Industrial Average was up 11 percent by the end of April, but plummeted 16 percent from that level by August.

The Standard & Poor’s 500 Index and the Nasdaq Composite Index rose in April and then fell by August as well.

Editor's Note:
I Wish I Were Wrong — Economist Laments Being Right. See Interview.


Today, the Dow is up almost 6 percent, the S&P 500 up over 8 percent, and the Nasdaq up 13 percent this year, MarketWatch reports.

Analysts tell the news service that recent healthy earnings, improving economic indicators and recent calm in Europe may be due for a change, and investors should consider going defensive in stocks

"Utilities, telecom and consumer staples are where you want to be if you have to be [in equities]," says John Canally, investment strategist and economist at LPL Financial, who also suggested being in cash or mortgage-backed bonds, MarketWatch reports.

Others agree that high-quality, large-cap companies are a safe play.

"The summer’s not only seasonally weak, but that’s especially true for small company stocks because of illiquidity, money is drawn from the markets and people shy from the riskier stocks," says Mark Luschini, chief investment strategist at Janney Montgomery Scott, MarketWatch adds.
Some analysts are a little more upbeat.

The U.S. economy is still improving despite hiccups and Americans know who the Republican presidential candidate will be, which ends political uncertainty.

"Certainly the market’s under pressure, but we’re not expecting the 15 percent to 20 percent declines like we did the last two summers,” says Paul Hickey, co-founder of Bespoke Investment Group.

One analyst, however, is less bearish, as earnings have been strong enough to keep stock prices up.

"Earnings revisions, which have returned to positive territory only recently, should support the equity markets in coming months," Philipp E. Bärtschi, chairman of the investment committee at Switzerland’s Bank Sarasin, says in a note to investors, according to CNBC.

"The first quarter 2012 reporting season indicates that cyclical sectors such as technology and consumer cyclicals have the greatest surprise potential."
Debt-ridden Europe could quickly turn things south.

"If the Euroland remains mired in recession until the end of the year, a fresh escalation of the euro crisis is likely," Bärtschi adds.

"Consequently, it will not take much to overturn what is basically a positive global economic upswing scenario."

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.




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