Friday, April 24, 2009

"Sell in May" tax effect might be very brief this year, if at all

With the average monthly fiscal deficit running about $160 billion so far this year that old, "Sell in May" stock axiom may not work this year. If anything, it's likely to be fleeting so don't expect a big stock market downturn.

Normally it takes several months of deficit spending to replenish the wealth drain that hits the private sector when taxes are paid in April. Treasury data shows that the April '07 surplus of $178 billion was the second largest on record (the largest was April 2001: $190 billion). Both of these wealth drains preceded huge market declines.

It took four months of deficit spending following that April '07 drain to replenish the level of private sector net wealth that was taken away. Not surprisingly, when enough deficit spending finally occurred, the stock market rallied. The Dow was up 5%in September 2007.

This year the wealth drain is likely to be far smaller than in prior years thanks to a weak economy and with so many people out of work. However, government spending rolls on and at levels never seen before.

So far this month, the Treasury has collected about $200 billion in taxes. That's less than half of the amount collected in April of last year and even below the level in April 2002 when we also had a weak economy. Yet spending has been averaging over $320 billion per month. So whatever the net drain ends up to be for April--say $250 billion--most of all of that will be repenished in about 12 business days! That's pretty much where we are right now and the reason I believe the market correction that had been occurring since last Friday, is OVER!! So, BUY STOCKS, because this year is NOT the year to "sell in May and walk away."


The Joker said...

Mike, you're right. This is the time to buy stocks. I wish I'd taken your advice earlier in the week and bought BAC. I waited as I thought it would go down a little bit after you said buy on the dip.

I should have bought on the dip, but my personal "analysis, paralysis" got in the way.

mike norman said...

The market's going higher, but there'll be more dips along the way. A significant amount of fiscal stimulus has been applied, and that means the market is likely going to go a lot higher than most people think. Keep putting money in your stock account and on down days, accumulate, accumulate, accumulate!!