Sell in May and Go Away
With Developed Economies still on a slow road to recovery and stock markets hitting all-time highs, now may be a wise time to get out of domestic stocks and invest abroad.
What is a deleveraging? The term refers to countries reducing their debt-to-income ratios when they are too high. It is generally accomplished through debt restructurings (writing off some of the country’s debt by saying “Sorry, I can only pay 50% of this”), austerity (raising taxes/cutting public spending), and/or debt monetization (printing money essentially).
These three things all have different benefits and consequences:
| Pros | Cons | |
| Debt Restructuring | You have less debt to repay! | Your lenders will not want to lend to you in the future because you have poor credit, which is bad for future growth. |
| Austerity | You are able to come up with money from the economy to pay off the debt | Austerity generally means higher taxes and less public spending, so the public is unhappy. Also, money that is generally used to stimulate the economy (public spending) is used to pay off the debt, so growth falls. |
| Debt Monetization | You can pay off the debt andYou can have money to grow the economy | If you print money excessively, then you run the risk of inflation. With too much money printed, this leads to a rise in prices for US consumers, and a fall in US consumer purchasing power. For many countries in the past, printing money to pay off debt has done more harm through inflation than the good in paying off the debt. |
The United States and Europe have both been deleveraging for the past few years, and the issue they face is this: how do they pay down the excessive debt without hindering the growth of the economy or causing inflation? The key may be in finding the right balance between the various deleveraging tactics. However, this is tough to do. If you want a mini- breakdown of how this is going, you can look into the original article attached below, but the point is that deleveraging is taking a serious toll on both the US and Europe. In the US, the economy still has a high unemployment rate of 7.7% (well above the Federal Reserve’s Target of 6.5%) and other tough economic factors, but stock markets are hitting all-time highs. This is leading many people to think that stocks are currently overvalued-meaning there should ideally be a correction in markets. In Europe, there has already been heavy austerity, and it is expected that there will be more. Stock markets have been depressed and are forecasted to continue to do poorly there as well. So the question becomes, where should you invest for stocks? A good idea may be to look into Emerging Markets. This will be topic of my next article, but for now as the saying goes-“Sell in May and Go Away,” for both yourself and your stock portfolio.