The bears are now hanging their hats on an old market bromide that says, "Sell in May and go away." The source of this advice is a historical truism that the overall stock market does much better in the November to May period than it does during the spring to early fall months. However, following a weak first quarter of the year, we strongly doubt the pattern will be repeated. Also, many individual stocks do their own thing whenever the buyers get excited. Another bearish argument is that the economy is going to drop back into a recession because of extreme caution among businesses. No question, capital expenditures have yet to recover and if they don't, consumers will have a hard time heavy-lifting the economy solely on their shoulders. Despite the current popular opinion expressed by the media on a daily basis, most executives of big and small companies are honest and anxious to keep their business profitable.
Last week Fed Chairman Greenspan said that he expects the economy to strengthen now that the war is over, but the degree of strength will depend on how soon business confidence recovers. Consumer confidence in April jumped to 81.0 from 61.4 in March. That was the largest monthly increase since the end of the first Gulf War in 1991. Put yourself in the shoes of a corporate manager. You have spent very little on new plant and equipment and information technology in almost three years. Then you see that March factory orders rose a sharp 2.2%, even though in this prewar period consumers were not feeling great. Now you get a little nervous about doing little for future growth because the war is over and oil prices have dropped dramatically. Standing still in the business world is going backward and guarantees that your competitive edge will be lost.
Business confidence will pick up. We guarantee it because it always has among those companies that survive and prosper long term. The pessimists believe that this recently strong market action is simply a bear market rally. They will be proven correct if the economy and corporate earnings do not perk up within the next six months or so. We believe the bear market ended October 2002 and that a new bull is evolving. Yes, we face an extraordinary number of uncertainties, but take a look at the potentially extremely positive situations: the war in Iraq is over and a democratic, nonterrorist nation could evolve; the price of oil has dropped sharply; Pakistan and India have agreed to peace talks; Syria and North Korea blinked; Israel and the Palestinians have improved chances of making peace progress; a tax cut is likely; after recessions and bear markets come recoveries and bull markets. We believe the successful market bromide this year will be,
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