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Why Stocks Will Rise in May

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After the drubbing stock prices have taken in the last few months, many investors are looking to reduce their exposures. Based on a number of macroeconomic factors, however, I think we may be in for a bit of a rally in May.

The biggest factor that should push up stocks this month is lower energy prices. Crude oil futures dropped about 18% in April, and according to a recent study performed at the Rotterdam School of Management, lower oil prices in one month are frequently followed by higher stock prices in the next month. The article, titled Striking Oil: Another Puzzle, doesn’t have a perfect track record in calling every up move in equities, but when one considers how much attention crude prices have been receiving, I believe a bit of a relief rally should be in the works.

The other factor that encourages me is the recent action in the bond market. After falling precipitously in March, bonds seem to have found their footing. When stocks and bonds fall together, there is no way for traditional investors to make money, which puts considerable pressure on them to pare back their portfolios. With bonds back on track, I suspect stocks will rise a bit as well.

The final reason I’m inclined to see a rally is that the other shoe has dropped for credit spreads. With all the talk of GM bonds being downgraded to junk status, investors have been reevaluating their expectations of corporate paper, and those expectations are now much more modest than they were earlier this year. In fact, a downgrade at this point would likely be a non-event, which puts a damper on any adverse reaction equities might feel if it indeed happens.

The real question is whether a rally will have any sticking power. There are still lots of bad things going on–a potential housing burst, higher rates, and a host of international uncertainties. In fact, there are so many that I doubt anyone’s crystal ball could see through such haze.

Index Apr-05 QTD YTD Description
S&P 500 Index* -2.01% -2.01% -4.54% Large-cap stocks
size=”-1″>DJIA* -2.96% -2.96% -5.48% Large-cap stocks
Nasdaq Comp.* -3.88% -3.88% -11.67% Large-cap tech stocks
Russell 1000 Growth -1.90% -1.90% -5.91% Large-cap growth stocks
Russell 1000 Value -1.79% -1.79% -1.70% Large-cap value stocks
Russell 2000 Growth -6.36% -6.36% -12.76% Small-cap growth stocks
Russell 2000 Value -5.16% -5.16% -8.93% Small-cap value stocks
size=”-1″>EAFE -2.24% -2.24% -2.33% Europe, Australasia & Far East Index
Lehman Aggregate 1.35% 1.35% 0.87% U.S. Government Bonds
Lehman High Yield -0.97% -0.97% -2.57% High Yield Corporate Bonds
Calyon Financial Barclay Index** -1.66% -1.66% -2.99% Managed Futures
size=”-1″>3-month Treasury Bill 0.78%
All returns are estimates as of April 29, 2005. *Return numbers do not include dividends. ** Returns are estimates as of April 28, 2005


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