European Debt Concerns And Slowing Growth Confirm Sell In May?

Despite all the hoopla associated with the initial public offering (IPO) of Linkedin Corp. (LNKD) – a would-be candidate for my analogue to Digital investing theme if I were one to recommend investing in IPOs– the overall stock market, as measured by the S&P 500, closed lower for the third consecutive week. While some will throw out the seasonal adage of “sell in May and go away,” another vantage point would be the market is feeling the weight of a number of factors in recent weeks – mounting signs the domestic economy is slower than previously thought, the lack of a viable solution for dealing with the nation’s debt ceiling, gyrating commodity prices, European debt concerns, the end of the Fed’s QE2, inflation concerns and more.
Adding to those concerns over this past weekend, Fitch downgraded its outlook for Greece, and Standard and Poor’s reduced its outlook for Italy from stable to negative, while May data points to continued slowing in both Europe and China.  HSBC’s flash manufacturing purchasing managers’ index (PMI) for May, which typically is based on responses from 85% to 90% of those surveyed, slowed to 51.1 from the April reading of 51.8. While still above the expansion line denoted by a reading of 50, May’s level marks a 10-month low for the PMI index. Private-sector activity in the euro zone decelerated to its slowest pace in seven months in May, according to preliminary purchasing managers index data released Monday by Markit.
As these concerns have risen, there has been a market shift in recent weeks toward companies that are less vulnerable to the economic cycle and what I have dubbed Guilty Pleasure companies.
Even so, the question that is increasingly on my mind is how much slower is the domestic economy likely to be compared to updated expectations from just a few weeks ago?
Last week, a survey from the National Association for Business Economics predicted GDP will grow 2.8 per cent this year, down from the group’s prior prediction that it wold grow 2.2 per cent that it released just in February. In the same survey, the group also reduced its outlook for consumer spending and the housing market, which the expectations that oil prices will remain above $100 a barrel through 2012.
Also last week, Fitch Ratings warned that school districts and counties will see their funding fall short as states, under pressure to balance their budgets, are cutting funds to local governments. All states except Vermont must finish their fiscal years with balanced budgets. When the housing downturn, financial crisis and recession first caused their revenues to collapse, the states slashed a variety of programs and hiked taxes, however several quarters later and with unemployment still at high levels, there are few areas left for states to cut.  Conservative estimates put the total state budget gap they will have to close at $80 billion, while other estimates put the budget gap over $100 million. With state fiscal years beginning on July 1, states have begun slowing down the direct transfers and reimbursements they make to local governments. While some states and local governments are in better shape than others, all in all, this is less than encouraging when pondering the incremental impact on the domestic economy.
A USA Today/Gallup poll conducted May 12-15, found that 67 per cent of Americans say the recent high gas prices have caused them financial hardship, making it one of the highest levels of reported hardship Gallup has seen on this measure since 2000. No wonder a recent May poll by Gallup showed that three in four Americans name some type of economic issue as the “most important problem” facing the country today. That percentage marks the highest net mentions of the economy in two years, and Gallup has been asking Americans the most important problem question on a monthly basis since 2001.
As we continue to inch further along in the second quarter, more and more the eyes of forecasters, management teams and investors will focus on economic prospects for the second half of 2011. Needless to say, investors will be scrutinizing ever more closely upcoming economic releases and management team forecasts in the coming weeks.
The Week Ahead
Following a mixed bag of corporate earnings last week thanks to The Gap Inc. (GPS), Aeropostale, Inc. (ARO), Lowe’s Companies, Inc. (LOW) and others, we will be hearing again from a number of companies this week across a number of industries – Applied Materials Inc. (AMAT), TiVo Inc. (TIVO), 99 Cents Only Stores (NDN), Costco Wholesale Corporation (COST), Hormel Foods Corporation (HRL), NetApp Inc. (NTAP), Toll Brothers Inc. (TOL), H J Heinz Co. (HNZ), Omnivision Technologies Inc. (OVTI), Tiffany & Co. (TIF) and a slew of others.
In those companies and others, I’ll be looking for confirming signs of not only for my existing investing themes and ones in development, but also for insight into how the respective management teams see a number of things compared to their views only a few months ago.  The company’s outlook near-term and for the balance of 2011, the economy, job creation and wage pressure, raw material pricing and inflation are a few of the things I will be paying attention to.
While corporate earnings season continues in the coming days, the economic calendar for the week is far more modest in terms of new data. New home sales and durable goods orders will be the key metrics in the first half of the week, while personal income, personal spending and prices associated with personal consumption expenditures (PCE) will be the ones to watch later this week.