In Q2, Prepare for Mettle-Testing Markets—Searching for Alpha for April 2012

I’ve spilled plenty of ink in the last few quarters touting the advantage of stocks over bonds (see March 2012 Searching for Alpha, and February 2012 on the best month for stocks in 15 years). Even after the first quarter’s stellar returns (see index returns below), it’s still likely that equities will continue their dominance. But with the approach of the seasonally weaker second quarter, I expect to see a respite to the near hyperbolic rise of stocks.  

Rather than listing the laundry list of (mostly logical) reasons the rally should take a pause, it makes more sense to concentrate on those issues that are most pertinent. Uncertainty surrounding the presidential elections would make that list, as well as rising energy prices.  Potential challenges to GDP growth, including weaker earnings and increased troubles in Europe, will also be on the radar screen. But let’s face it: there are so many problems in the world that bears will have no issue explaining away stocks hitting an air pocket.

Long-term investors should stay the course. The long-term fundamental case for stocks is still very strong. Trying to time any potential market sell-off is difficult to impossible for most traders, and could trigger adverse tax consequences. Rebalancing into any pullback is a much more reasonable strategy.

 

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