Market Strategy Radar Screen Weekly - May 2, 2016

Sell in May and Go Away?
We don’t think so…

From the perspective of the earnings season it would seem to make sense for skeptics to question just how good the broad beats of consensus expectations have been, considering that the quarter is yet another in a series of quarters in which analysts had slashed less pessimistic projections made earlier just before the start of the current earnings season.

Disappointments last week when a number of tech bellwether stocks reported results, including Apple (AAPL) and Microsoft (MSFT), helped turn investor sentiment a tad sour even as Facebook (FB) surprised in robust fashion to counter investor blues.

Market concerns about inflation risk had also been raised in the course of the last few weeks as commodity prices had powerfully rallied from what we believe were much oversold conditions as well as from support coming from a decline in the dollar against developed and emerging market currencies that made them attractive (see charts on next 2 pages) rather than from a surge in global demand.

No sooner had worry turned to inflation risk than deflation risk worries resurfaced with a spate of disappointing data that included evidence of sluggish wage growth, modest core inflation, a drop in durable goods orders, a drop in new home sales (even as existing home sales improved), weakness in manufacturing and a durable goods orders number that fell short of expectations.

In short it appears to us that a mixed bag over the last few weeks took investors’ focus off of gains in March, when the S&P 500 soared 6.6%, only to fret over April, when the broad market stumbled from a 2016 peak of 2102.4 on April 20th to post an all too modest gain for many investors’ expectations of just +0.27% by month’s end.

To us it looks like the market’s message in April to investors, traders, sideline observers, wellwishers and nay-sayers was a reminder that stocks don’t tend to travel in a straight line in any one given direction for a prolonged period of time.

Indeed the historic tendency of markets in our experience is for markets, much like life, to climb a wall of worry (see figure below).

We suggest that investors recall that the month of April has since 2010 shown a tendency to be a period of market reflection on where it has been and where it would like to go (see figures below). Depending on what conditions the market finds itself surrounded by at the time can lead to a jump in volatility.

The recovery process from 2009 through today points to the early-to-late spring period being a time when markets often become challenged, whether from developments abroad or stateside.

For now, we’d suggest investors exercise patience, fasten the proverbial seat belts in case of turbulence in the near term and consider portfolio weightings, exposures and overall diversification.

We remain pro-cyclical globally in our stance toward equities, believing that growth stateside remains sustainable if at a very modest pace, while abroad green shoots in economic growth appear intermittently as a recovery in Europe and a process of repositioning by authorities in China takes place.

Over the week just ended news flow from abroad showed that Europe’s economic growth in Q1 of this year outpaced US growth in the same period as the overall economy of the 19 countries in the euro zone advanced 0.6% versus US growth of 0.5% in the same period.

While 0.5% growth in Q1 for the US raised concerns that the expansion might be slowing, for Europe 0.6% growth marked the first time in eight years that the output of the region’s economy had exceeded its pre-crisis high.

As we went to press on Sunday night, China’s Manufacturing PMI showed a second month of improvement, signaling China’s economy may have begun to stabilize.

Stay tuned.

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