Sell in May and go away!

A few week's ago AME Info columnist Dr. Marc Faber called a major top in global equities, and declining stock prices this week suggested that - once again - his forecast was spot on. To summarize his logic: a long rally since the Iraq war is running out of steam and US interest rates will have to rise from present lows to combat commodity price driven inflation. Thus equities could under perform for another couple of years. This is the classic shape of a major bear market; a long decline, strong rally and then a final descent to the bottom. The tendency of all markets is to overshoot on the upside, and also to overshoot on the downside. So in the same way that we saw the Millennium bubble in stock prices, we can expect to plunge into a major trough in share prices. That is the point at which to buy back into the market. Too pessimistic? Too gloomy? Well, if you are a student of economic history then this is simply a repeat of past economic cycles. To expect anything else is unrealistically optimistic. History constantly repeats itself. Even human optimism in the face of an obvious downturn has been seen many times in the past. There is nothing new under the sun. Ah, but it will be different this time? Sorry, when investors say that this is a classic indicator that the downturn is imminent. History is a merciless mistress. What about local Middle East stock markets? From a contrarian viewpoint these markets are inversely correlated to global equities; vis-à-vis the high oil price that cripples industrialized economies is hugely beneficial to the Middle East. Under these circumstances the huge upward swings in local profits now being reported will continue. This should support local stock markets against the global trend, although the herd mentality of investors does tend to lead to a local sell-off even when it is almost entirely unjustified except on the interest rate outlook. The same argument can be applied in the local versus global real estate investment dilemma. Higher global interest rates are going to knock the sector hard - it has been supported by record low interest rates for too long allowing valuations to climb to ridiculous levels. But strong local economies in the Middle East should support the real estate sector. So this is not an easy time for personal financial planning. If in doubt, stay out, is one answer. Cash is king in falling markets, even if inflation ticks up a little. And you will not be in a position to buy stocks and real estate at distressed prices in a few years' time if you have sat on declining assets.