Selling in May??
“Maybe someday, saved by zero” is the theme of global central banks. But their foray into negative territory has created havoc in the investment world as few truly understand the long-term implications of negative interest rates. The Bank of Japan passed last week on injecting more funds into the system, thereby pushing rates even further below zero. This was a surprise that turned equity markets lower. The thought behind negative rates is that it would create borrowing activity, when in fact banks have reduced loan activity in favor of bolstering their reserves.
The recent economic data indicates the US is wobbly, getting close to zero growth. The only good news in the US is employment is growing and we’ll get a fresh read on that Friday morning. We may also get a glimpse on the havoc the wild moves in energy prices have on the economy as well from the service and manufacturing reports. We will be hearing from more than a couple of Fed governors weighing in on their economic views. If one is the loneliest number, zero can’t be much fun either!
The markets ended the month with a thud, on the heels of some bad earnings reports from Apple, Gilead and Google. The technology heavy OTC market has lagged the other popular indices over the past month. However, the once trashed energy and basic materials sectors are looking rather dapper. Some of the smaller, riskier stocks have doubled in the span of six weeks. Small cap, international and emerging markets are all looking better since mid-February, improving as the expectations that the dollar will continue lower and economic growth will re-emerge. Many of the market internals from momentum to volume are pointing to a period of rest. The Wall Street mantra has been to sell in May and go away. This year may actually be a good one to do so! Valuations remain stretched for the popular averages. Earnings, while still beating estimates, are barely keeping up with last year’s pace. Valuation has never been a good “timing” tool, as the markets can stay over valued for long periods of time before finally correcting. It may also be that the very low rate environment is forcing investors into the equity markets in hopes of finding a return.
Stocks have moved very little since Halloween 2014 and earnings are off by 16% for that same period. Valuations may not drive the markets over the short run, but it is hard to argue with them over the long-run Investors have moved away from the safe haven of treasury bonds and back into corporate bonds. High yield, otherwise known as junk, has done very well over the past six months as they track the stock market. There will be plenty of talking points this week from various Fed governors, so expect the bond market to get bounced around. What is not a surprise is that bonds are beating stocks (again!) this year. The bond model is still pointing to lower rates, although the pick-up in commodity prices over the past six weeks could change that picture in the weeks ahead. For now, we are maintaining our positive views on bonds and expect they will continue to provide a cushion for the wilder gyrations in the stock market. Up until the end of the week, we were prepared to wave the white flag and buy stocks with both fists. What changed was the lower turn in small cap stocks vs. the SP500 and weakness in the largest stocks (Apple & Google among others).
The run in commodity prices, predicated on more spending from China, may have some legs. Their recent breakout from longterm declines is worth noting. It is hard to square the higher commodities with lower interest rates and slow economic growth. IF commodities are experiencing one of their many maniacal runs higher, similar to the first quarter of last year, without the backing of improving economic data, then it is best to stand aside. Bonds and the “safer” stocks will once again regain the performance lead. IF however, economic data begins improving both here and abroad, the commodity run may be still be in the early innings and we could see significant moves even after the 20% gains already achieved.
We came into this year expecting the SP500 to be a laggard index, but there remains uncertainty which other asset classes would take the lead. Other than bonds, commodities and emerging markets may take up that challenge. For all the concern about the Fed raising rates, bond performance has still surpassed that of the SP500 so far this year, without all the drama. Smaller asset classes like commodities and emerging markets have had huge moves in April, but whether they can be sustained is the million dollar question. We should get some answers relatively early in May. Still liking bonds and the “safer” large cap stocks paying dividends.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.