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“SELL in May and go away” is a Wall Street axiom popularised by the Stock Trader’s Almanac and refers to the historical underperformance of equity markets during the six-month period from May to October.
Its reliability as an indicator has been questionable during this past decade (the May to October period has delivered average gains for the S&P 500 index of over 4%), while it is also worth noting that the S&P 500 index, arguably the greatest barometer of global risk appetite, has generated returns of over 7% between June and August in presidential election years.
May 2024 has started well for risk assets, with US stock indexes posting their third consecutive week of gains. The Dow (+1.5%), Nasdaq (+0.3%) and S&P 500 index (+0.8%) all closed this week within spitting distance of all-time price highs. With polls currently pointing to a very tight finish to the US election race later this year, President Biden and his team will certainly be hoping that markets continue to behave themselves over the summer months.
The projected path for inflation and interest rates has taken centre stage this cycle, demoting corporate profits, one of the most important determinants of long-term market returns, into playing second fiddle.
Yet, in a quiet manner, corporate America has broadly delivered again. With over 90% having officially reported, S&P 500 companies have beaten first-quarter earnings estimates by an average of 7%, while management guidance has indicated that 10% year-over-year earnings growth is achievable in 2024.
Solid news flow from corporate America was enough to offset rumblings of discontent on the back of data released during the week. A widely followed measure of American consumer sentiment from the University of Michigan posted a preliminary reading of 67.4, down from 77.2 in April and the biggest miss (in terms of margin relative to expectations) in the history of the data set.
Meanwhile, in an alarming development for Chairman Powell and colleagues at the Federal Reserve, the same survey results also showed that consumers expect prices over the next five to ten years to increase +5.3% (a 30-year high).
Central bankers that have rolled out the “inflation expectations remain well-anchored” line during this cycle will be squirming and hoping (praying) this data point was a blip.
Finally, new filings for unemployment benefits rose to the highest level in more than eight months, with the latest weekly update from the US government recording 231,000 new unemployment claims, up significantly from 209,000 the prior week.
Signs of cracks in consumer sentiment, economic growth and the employment picture, along with stickier inflation prints have coincided with a significant spike in “stagflation” searches in Google and Bloomberg. The whispers are getting louder.
Closer to home, there were reasons for cheer, as the FTSE 100 equity market continued its recent trend of outperformance versus the US. The UK economy returned to growth (the fastest rate in three years) in the first quarter, with GDP expanding 0.6%, after experiencing a shallow recession in the second half of 2023.
The turnaround will give Prime Minister Rishi Sunak some much-needed ammunition that his party’s post-pandemic policies are working. Separately, Bank of England governor Andrew Bailey pushed back against a lower cutting cycle in the UK, pointing to the different inflation dynamics from those facing the US, which gave markets optimism that a June cut might be forthcoming. Markets have swiftly moved to price in close to 60% odds of this happening.
Looking ahead, all eyes will be on the US Consumer Price Index report, scheduled for release today. Will the recent trend of hotter-than-expected inflation prints extend into April, or will a disinflationary reading provide the Fed cover to cut rates?
