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Should you sell in May and go away?

We think not—Q1 earnings, markets, consumer spending, and jobs are pointing towards continued strength.


Our Top Market Takeaways for May 7, 2021.

Quick hit 

Market morsels for May 

May is bringing both sunshine and rain. Many in the developed world have the privilege of heading back into restaurants, the arms of loved ones, or even the office. But at the same time, emerging markets continue to struggle with dire COVID-19 conditions. Better-off governments are now walking the tightrope of supporting their own populations while also acknowledging a human obligation to help out less-fortunate nations. 

Despite these differences, broadly the world is trending in a direction of strength, with the U.S. in the lead. The recovery is genuine. As we look forward to the light at the end of the tunnel, we’re sharing five market morsels on our minds this week.

  1. Who needs fireworks when you have Q1 earnings?! Of the over 400 S&P 500 companies that have reported, 87% have beaten earnings estimates (an all-time high!). As it stands now, Q1 earnings for the index look to grow close to 50% from the prior year (more than double what analysts were expecting at the start of the season, and the highest since Q1 2010). All 24 members of the KBW Bank Index beat estimates for the first time in history. FAAMG stocks, taken together, beat net income expectations by over $22 billion for the first quarter alone. That’s more than the market cap of about 180 S&P 500 companies.

    The point is that strength has been both eye-popping and widespread. We’ve anchored our positive outlook for stocks on expectations that earnings would do the heavy lifting, and they are delivering. Going forward, it’s a key reason why we think U.S. stocks could be resilient in light of future headwinds like changes to corporate tax policy. Even after we incorporate expectations for a rise in both the statutory and global intangible low-taxed income (GILTI) corporate tax rates, we’re more constructive on potential 2022 earnings than we were at the start of the year.

  2. Cyclical stocks just keep on flexin’. Banks, industrials, and materials each notched all-time highs yesterday as investors continue to look forward to re-opening and recovery. Meanwhile, early COVID “winners” are lagging. Clean energy is down -40% from its highs, onshore Chinese stocks are down -14%, and semiconductors are down -7%. As we said last week, it seems that the “easy” gains for stocks may be behind us—for instance, investors aren’t rewarding earnings beats with the same fervor they have historically. Consider that, even with stellar results, FANG1+ is down -10% from its highs. It will be key for investors to look under the surface of headline returns moving forward—to us, we think it makes sense to have exposure to both cyclical areas of the market that are accelerating and secular megatrends that can drive future growth (even if they face some near-term challenges)

     

  1. Are we gearing up for a *hot consumer summer*? After a recession, we tend to see consumer credit card balances fall as banks write-off borrowing gone bad. Compared to pre-COVID levels, credit card balances are down around 13%, but this time around it’s because households themselves have paid down their debt (enabled in large part by government stimulus paychecks and other relief provisions). In aggregate, consumer balances sheets are emerging from this crisis in great shape.

    Households shored up a lot of savings throughout the pandemic, and we think that will help fuel strong consumption as reopening becomes a reality. Our assumption that a little less than half of the ~$2 trillion in excess household savings gets spent down this year accounts for a big part of why we think the U.S. economy will grow by 6.4% this year. And more spending, especially in service-oriented sectors hit hardest by the recession, bodes well for businesses’ ability to hire workers. 

  2. Jobs are coming back, but it’s a slow process. Today’s jobs report brought news that the U.S. economy added 266,000 jobs in April—well below the one million that were expected. Overall, employment still stands roughly 10 million workers short of what its pre-COVID trend would have suggested. And even though the “official” U.S. unemployment rate is 6.1%, this figure doesn’t account for the many workers who have left the labor force, in part induced by various job and income protection schemes around the world. An analysis by LB Macro tried to account for this “hidden unemployment” and found the “actual” unemployment rate could be something closer to 9%.

    But it wasn’t all bad: average hours worked ticked higher and soared for workers in the leisure and hospitality sector. Labor force participation also rose.

    Taken altogether, the full report seems to suggest that there’s a lot of demand for workers to fill open roles, but not enough workers to satisfy them—whether because of fears over the virus or because of continued unemployment benefits. Bottom line: the jobs recovery is underway but has a long way to go.

  3. What about, “sell in May and go away?” It’s true: stock market returns tend to be stronger from November through April than they are from May through October. Explanations for the trend usually have something to do with the temptress that is warm weather luring market participants away from their trading desks.

 

But investors should be mindful of what they may be leaving on the table. Since 2010, the only year in which divesting from the S&P 500 from May through October left you better off was 2011. That was the summer of the European Sovereign Debt Crisis, and the S&P 500’s bear market was nearly perfectly timed from May 2 through October 4. We would be remiss not to also mention the potential tax consequences that would come from selling stocks every April 30 – that too eats away at whatever occasional “benefit” an investor might get from trying to trade around the calendar. 

Like we said, this month is bringing both sunshine and rain. But we're looking forward to the flowers. 

 

 

1.

 FANG+ is classified as an equal-weighted index representing a group of highly-traded growth stocks of technology and technology-adjacent companies including Facebook, Apple, Amazon, Netflix, Alphabet, and others.

 

All market and economic data as of May 2021 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.

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