Sell in May and Go Away?
By John Stoltzfus,
Chief Investment Strategist
Let’s Make a Deal” Meets “The Apprentice Goes to Washington
Markets rally as economic data, earnings and geopolitics show progress
Last week saw stocks rally stateside with solid gains across the major indices after equities caught a bid as traders and investors appeared to relax and let go of some of their nervousness about inflation, wages, commodity prices, currencies, Fed policy, domestic politics and geopolitics—all of which have held stock prices hostage and jostled market performance and investor sentiment since late January of this year.
By last Friday it appeared to us that a confluence of factors had taken hold including an apparent acceptance by traders and investors that first quarter earnings season had shown enough strength to consider the possibility that corporate fundamentals might continue to improve in the months ahead.
While skeptics seemed to continue to embrace the idea that the first quarter may have delivered the peak in earnings growth for this cycle, another thought appeared possible: that the quarters that lie ahead this year could continue to show attractive earnings growth and perhaps a boost in revenue growth should wages pick up and corporate managers feel justified in raising capex. This would represent a shift from the current corporate strategy focused primarily on share buybacks and dividend increases.
On the political front the administration’s apparent progress with North Korea and some indication last week on how it might deal with drug price reform in the US along with what route it might take regarding automakers’ concerns about changes in emission standards each contributed to last week’s rallies in equity markets here and abroad.
Over the weekend the olive branch that appears to have been extended to Chinese officials related to Chinese telecommunications company ZTE would appear to add to the markets’ expectations that risks to further upside in the stock market may have begun to recede at least in the near term.
Economic data and corporate earnings reports that crossed the transom last week (see pages 4 and 5 of this report) were supportive of the view that the current economic expansion in the US could continue at a moderate pace. In our view this could generate a healthy level of economic reflation rather than levels of inflation high enough to cause trouble for the economy or the stock market.
“Most encouraging to us were the stronger gains posted by the domestic and cyclically positioned Russell 2000 and the highly cyclical and tech heavy NASDAQ Composite.”
Small Cap Rally is Encouraging
The Dow Jones Industrials, the S&P 500, the S&P 400 (Mid- Caps), the Russell 2000 (small caps) and the NASDAQ composite (over 40% weighted in technology and tech related companies) respectively advanced 2.3%, 2.4%, 2.2%, 2.6% and 2.7% last week.
On a year to date basis those same indices now stand respectively higher from the start of the year to show gains of 0.5%, 2.02%, 2.03%, 4.6% and 7.2%.
Most encouraging to us were the stronger gains posted by the domestic and cyclically positioned Russell 2000 and the highly cyclical and tech heavy NASDAQ Composite.
In an environment where the leadership of the US economy and equity markets is paramount to global growth we are reminded that the concept of the world’s economies decoupling has been repeatedly debunked by the longestablished ties inherent in production in the modern global economy.
On the international scene MSCI EAFE (developed markets ex US and Canada) managed to rally modestly last week gaining 1.4% as the risks of trade wars appeared to subside somewhat and as monetary policy makers in Europe and the UK signaled that economic growth—though improved—still does not warrant much central bank concern for inflationary pressures.
The MSCI Emerging Markets Index advanced 2.5% last week delivering its best weekly gain since the week ended on February 16th when it jumped 4.98%.
Even as currency volatility remained a factor to contend with, the strengths of local economies, particularly in Asia, along with attractive market valuations and embedded crossregional secular trends garnered investment flow for a rally similar to that in the US markets.
MSCI frontier markets lagged the developed and emerging markets last week as currency and interest rate risk from the process of rate normalization in the US moved some investors to take profits in the asset class.
The 10-Year Treasury Yield Eases Back Below 3%
The US 10-year Treasury yield closed last week at 2.97% close enough to its high for this year of 3.02% (on April 25th) reminding traders and investors that interest rates are likely to continue to edge higher so long as the economy continues to improve and the Fed remains committed to the process of interest rate normalization.
While no “all clear” signal has ever been sounded for the markets (nor is it likely to happen), progress not perfection remains a good way to keep investor expectations right-sized. Carpe Diem.
This report is issued and approved by Oppenheimer & Co. Inc., a member of all Principal Exchanges, and SIPC. This report is distributed by Oppenheimer & Co. Inc., for informational purposes only, to its institutional and retail investor clients. This report does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The strategist writing this report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security discussed in this report, the recipient should consider whether such investment is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal.
Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation
should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser.
This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The S&P 500 index figures do not reflect any fees, expenses or taxes. This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This report is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA’s protection rules nor compensation scheme may be applied. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright © Oppenheimer & Co. Inc. 2015.