Stocks turned in their worst monthly performance in two years in May. Our last Searching for Alpha newsletter on AdvisorOne mentioned that stocks were overbought and that a sell-off was a bit overdue. So what’s next? Here are a few thoughts on the next few months.
(1.) When it’s time to re-enter the markets, the best entry point will likely be in U.S. equities.
Even though European bourses have taken the brunt of the market damage, analysts have been cutting earnings estimates so aggressively that the Continent’s P/Es have barely budged. That’s not the case in the U.S., and the sharp drop in the last month should set the stage for a good buying opportunity in the mid- to late summer.
(2.) Having said that, the time to re-enter the markets is not quite here.
There will likely be rallies and drops along the way, but until a more cohesive strategy to further unite the EU economies is agreed on, the general direction of stocks will most likely be lower.
(3.) Once there is further visibility on Europe’s plan, expect sovereign debt to take a nosedive.
Global Treasury securities are at levels that make no sense; with even the hint of inflation, most durations will produce negative real yields. I expect the equity and fixed income markets to head in opposite directions when stocks finally find a bottom.