May 27--Until this week, it seemed silly to heed the typical seasonal slogan for the stock market and "sell in May and go away."
Now investors aren't so sure.
On Tuesday, the Dow Jones Industrial Average fell 190 points and put an end to one of the strongest winning streaks for stocks in a year. Suddenly, the factors that made May a winning month for stock market investors started coming into question. It had become common lately to assume global deflationary pressures were over and that U.S. companies wouldn't be as burdened as they'd been earlier this year by a strong U.S. dollar as other countries gained their economic footing.
But old concerns returned Tuesday. Investors were worried again about muted global growth, the threat that Greece would default on massive loans with a June 5 deadline, and the dollar soared anew.
The dollar tends to gain strength when investors are less sure about economies in other parts of the world. With the strong dollar, U.S. companies earn less money than they would otherwise on sales in other countries. And U.S. companies are at a disadvantage as they compete against companies that can offer lower prices because their currencies are weaker.
Now, after a short period when the euro strengthened this month and took some pressure off the dollar, the dollar's reprieve ebbed Tuesday. Many analysts say that a stronger dollar is likely for an extended period.
"The global recovery continues to somewhat disappoint," Deutsche Bank economist David Folkerts-Landau said in a report to clients. "Although growth momentum is no longer slowing, concerns remain."
"Europe stands out as an undeniable positive story," he added. "But recent data have been weakening."
Since investors expected more from the global economy than it's likely to deliver, Folkerts-Landau and others are expecting more stock market tumult. Besides economic concerns, investors are expected to be squeamish about U.S. stocks as the Federal Reserve gets closer to raising interest rates. Higher rates are likely to make the dollar stronger, making it tougher for U.S. companies to compete globally at the same time as companies face higher borrowing costs.
On Tuesday, basic material stock prices fell along with technology stocks. The U.S. companies in those businesses depend heavily on overseas sales.
"We see downside pressures on commodity prices re-emerging," Goldman Sachs commodity analyst Jeffrey Currie said in a report to clients. "We are most bearish on copper" because it's most exposed to pressures from a stronger U.S. dollar and slowing growth in China and other emerging markets.
Yet copper has gone through one of its strongest rallies in about a decade. Despite worries about debt and slowing growth, the Shenzhen Composite of China stocks surged more than 100 percent this year.
Rallies in China and Europe have been driven by massive efforts to stimulate the economies through low interest rates and other means. Stocks have run up in anticipation of the stimulus working and reflating economies.
But Citigroup economist Willem Buiter said in a report to clients last week, "there is little economic evidence to suggest that reflation, defined as a sustained pickup in underlying inflation, is imminent."
"Global growth was probably below global potential growth in the first quarter, and we remain skeptical that the ECB (European Central Bank) QE (quantitative easing) or Chinese stimulus measures will succeed in sustainably raising inflation."
In fact, he added, "fundamental developments in the global economy currently provide little support for a reflation view."
As Europe and China work at stimulating the economies, both continue to be held back by an overhang of debt that gets in the way of new lending, he said.
Although the U.S. stock market is at an all-time high, Morgan Stanley strategist Adam Parker said in a report to clients that he's still bullish on stocks.
Although some analysts argue that stocks are pricey, Parker said U.S. stock valuations are still better than government bonds throughout the world. And that will keep people invested in stocks even in a modestly growing economy.
gmarksjarvis@tribpub.com
