There is a lot of worry that stocks this summer will repeat the negative performance pattern of the last two summers. Markets hit their 2012 highs around the end of the first quarter and since then, the volatile, negative price action has led  many to groan “Here we go again!”  Peloton does not believe we are in for a 3-peat of the last two years, but as we have discussed before, our elected officials have an uncanny knack for snatching defeat from the jaws of victory.

Before assuming that this summer will be the third consecutive validation of “sell-in-May-and-go-away,” consider the fundamental differences between now and the previous two Mays:

Today

May 2011

May 2010

Unemployment rate

8.1%

9.0%

9.6%

Initial jobless claims 4-week moving average

379,000

433,500

456,250

S&P 500 trailing 4Q operating earnings

$96.44

$83.77

$56.86

S&P 500 trailing 4Q P/E

14.1

16.1

19.5

Eurozone financial status

Uncertain but stabilized

Critical but known

Emerging and open-ended

 

Doug Kass, founder and president of Seabreeze Partners and equally willing to short or long the markets, has a constructive view on the economy and is very bullish on stocks – especially relative to bonds.  He sees the summer of 2012 shaping up more like the summer of 1987 than 2010/2011. In the summer of ’87, stocks rallied roughly 20%.  Brian Wesbury, chief economist at First Trust, calls this the “plowhorse economy” – moving forward but slowly.

At Peloton, we continue to believe that underlying fundamental economic trends remain positive, and we wish we would have coined Wesbury’s “plowhorse” label.  Growth has been slower than it would naturally be at this stage of a recovery because it is being hindered by fiscal and regulatory uncertainty and an decidedly unfriendly tone towards American business from the Obama administration.  Europe is not helping, but the “fiscal cliff” we are approaching at the end of 2012 poses a real financial threat to businesses and individuals – and ultimately the path of market-based capitalism in the US. Heads of households and corporations alike need some degree of clarity regarding the environment in which they are making investment and hiring decisions. Otherwise, how can anyone commit capital? In other words, we need to know the dimensions of the playing field and the rules of the game before we can call the next play.

Things are clearly better than they were a year ago and two years ago.  Fundamentally we don’t think that the financial market patterns of 2010 and 2011 should be assumed simply because the calendar says it is once again May.  However, we believe that policy makers in Washington have more power than at any time in memory to undermine what would otherwise be a decent growth trajectory for the economy and stocks.  If Congress again abdicates its responsibility to act (this year on the “fiscal cliff”) like it did in 2011 on the debt ceiling debate, we could have a 3-peat for stocks.  We hope and believe this will not be the case.