UH-OH: As if investors needed another reason to be cautious right now, it’s nearly May! One of the most famous finance adages says, ‘sell in May, and go away’. There is some truth to this adage, with May-October median S&P 500 returns half that of the rest of the year (see chart), driven by the weak and typically low-volume summer months. This compares to year-end and Q1 market strength when investors reposition for the ‘new year’ and companies lay out their plans. We see poor seasonality more than offset by ‘less bad’ fundamentals and less policy fears.
CONTEXT: It has not been a typical start to the year, with the median return over 5% lower than the long-term run rate. The most famous example of a turnaround from an early-in-the-year market rout was only two years ago in the covid crash rebound. That was driven by a dramatic fiscal and monetary policy response. If we are to see a rebound later this year it will likely also include a policy push, with a less aggressive or at least fully priced US Fed, fiscal and interest rate recession ‘buffers’ in Europe, and covid lockdown easing and interest rate cuts in China.
ROTATE: Rather than ‘selling in May’, we would focus on rotating into those segments best prepared for the new, tougher investment world. Our cheap cyclicals equity focus helps against continued threat of lower valuations, and positions for our ‘less bad’ base case. Energy (XLE) and financials (XLF) are the cheapest sectors in the market. Whilst traditional defensives, like healthcare (XLV), and styles like high dividend (HDV), help against growth slowdown fears.
All data, figures & charts are valid as of 28/04/2022