TORONTO — The spring stock rally looked solid enough going into May, but analysts think it may be ripe for a pullback, giving new emphasis to the old saying about walking away from the market after the first four months of the year.
Both the Toronto S&P/TSX composite index and the Dow Jones industrial average are up around 25 per cent since the rally took hold March 10 and Andrew Pyle, an investment adviser with ScotiaMcLeod in Peterborough, Ont., said he didn’t think that pace would last.
“I think if there was going to be ever any credence given to the whole topic of ‘Sell in May and go away,’ this would be the year,” he said.
The rally has been kept afloat on corporate earnings reports that met or exceeded low expectations, and economic data that suggested the worst of the severe recession may be past.
“I think that’s real, I don’t think it’s fake,” Pyle said.
“Maybe there’s a little residual hit to be taken on the housing side for both Canada and the U.S., but largely when you look at the broad cross-section of indicators, I do think the bottoming process is in place, it’s happening.
“But there are still a lot of outstanding issues.”
One of them is the financial sector and the results of U.S. government stress tests on 19 large U.S. banks, which were at be released Thursday.
Pyle thinks it’s an exercise that won’t do much good for anyone.
“It’s a very dangerous thing because .... once you embark on that, you have to come clean with everything,” he said.
“People have been very confident that after the mistakes of October, November, February, Washington finally learned its lesson — Obama is now a seasoned guy after 100 days in office and everything is fine — and I think this is going to be a wake-up call.”
Pyle doesn’t think investors will be quite so willing to give corporate news and economic data the benefit of a doubt as they have since early March, “and that leaves us vulnerable to pullback.”
He noted that a month ago, a plunge in U.S. employment failed to dent investor enthusiasm.
But this Friday’s report on April employment, expected to show the disappearance of another 610,000 American jobs and a possible rise in the U.S. unemployment rate to nine per cent, may get quite a different reception.
“I don’t think the market is going to be happy with it,” he said.
“Everyone said we were going to get to nine per cent but that was back three months ago when we were feeling really crappy. Now we’re feeling good — and feeling good about things, nine per cent is not good.”
Canadian employment figures also come out Friday. Analysts expect the economy shed another 50,000 jobs, lifting the decline to over the past six months to more than 400,000, or 2.4 per cent of the workforce.