June Gloom Doesn't Mean Doom

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Kristina Hooper is the US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

There's an old adage about the stock market that everyone seems to be quoting right now: “Sell in May, and go away.” But that's not exactly good advice.

First, tech stocks typically do well in June. Since 1971, the Nasdaq Composite Index has risen an average of 0.7% for the month. Second, stocks generally behave differently in a pre-election year. Since 1971, the S&P 500 has averaged a 0.03% decline in June. But in the years prior to presidential election years, it has averaged a 1.4% gain.

Sell in May

Of course, past performance doesn't forecast future performance. And this June certainly has the potential to be disappointing. We expect more volatility and could see a significant sell-off, with a number of events posing a threat to the stock market. A market drop could be set off by investors' realization that the Federal Reserve may begin liftoff sooner than they expected.

We have long worried about the mismatch between market expectations and our own view of when the Fed would start hiking rates. For example, a strong jobs report on Friday could be a catalyst. We expect non-farm payrolls to come in well above 200,000 jobs.

Wages and Liftoff

More importantly, we should see improvement in wage growth. One indication of higher wages comes from the Richmond Fed's manufacturing index. While price readings for May were generally flat, wages actually rose 11 percentage points.

But wage growth isn't experiencing strength in all regions. Just look at the disappointing manufacturing data from the Dallas Fed, which shows that lower energy prices are taking their toll on the region. While wages and benefits remain solidly in positive territory in Texas, they've fallen in the past month.

However, despite some regional weakness, we could see enough overall wage growth and job improvement in the May jobs report. As a result, investors may begin to worry that the Fed will act sooner than they had initially thought.

Meanwhile, another event that could cause a selloff is a “Grexit.” In the past few days, International Monetary Fund chief Christine Lagarde has acknowledged the possibility that Greece could exit the European Monetary Union. That suggests the probability of such a move has increased.

While some market observers may argue that a Grexit is already priced into the stock market, others say these events get priced into the market twice—once on the rumor and then again when the actual event occurs. Most observers still expect a resolution, so a default by Greece would likely create a lot of volatility.

But Greece still has some breathing room, as the real deadline seems to have shifted to the end of June. At that time, Greece would lose its “program country” status if no agreement is reached. If there is a Grexit, then we expect a market selloff to ensue—but it should be relatively short-lived.

3 Reasons to Buy on the Dip

Even if this June turns out to be disappointing for equity investors, we caution against running for the exits. Investors should view any June selloff as a buying opportunity. Here's why:

1. We're in a global environment of financial repression. Simply put, it's risky to not be in risky assets: Ultra-loose monetary policy is structurally positive for stocks when other asset classes are poised to yield low returns.

2. Despite stretched valuations, US stocks could positively surprise later this year. Expectations for US stocks have been beaten down to the point where a slight improvement in earnings could goose prices.

3. Dividends are a strong alternative source of income. With the 10-year US Treasury currently yielding less than 2.1%, the dividend yield on the S&P 500 is competitive at 1.9%. And the potential for capital appreciation makes dividend-paying stocks even more attractive.

So if there is a June swoon, don't despair. Use the pullback to selectively add to your equity exposure, particularly dividend-paying stocks.

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Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.

A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.

Dividend-paying stocks are not guaranteed to continue to pay dividends.

The Standard & Poor’s 500 Composite Index (S&P 500) is an unmanaged index that is generally representative of the U.S. stock market.

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585, us.allianzgi.com, 1-800-926-4456.


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