May has now started and a few weeks ago [1] I covered the many reasons why this could be a “sell in May and go away” year. You might recall I threw in North Korea, Syria, Vladimir Putin, Donald Trump, the US Congress on the latter’s health and tax plans, as well as the fact that stock market valuations looked stretched.
But over the past week there have been developments that have made me wonder if 2017 could be a “Buy in May and stay!” or at least don’t sell and sit tight?
Let’s recap on an interesting chart that looked at 37 markets over 15 years.
This chart, sourced from CNBC and the product of academics at the University of Miami, shows how good November to April is for stocks. We all know it has worked out well across 2016-17 since the Trump victory.
But let’s focus on the May-October period, which has been a positive experience on average but only just with a 0.95% gain. This would have come from some really bad and some really good periods but the low average level shows the bad years bring down the good years big time but at least it still stays positive. That said, this is not necessarily an argument for sitting tight because it is only an average or mean figure, not a median number.
Away from statistics, let’s list some recent developments that make you think a May sell-off of stocks is looking less likely. Here goes:
- The French election looks good for stability in the Eurozone.
- Eurozone inflation is near a four-year high at 1.9% and the ECB boss, Mario Draghi, last week argued that “the downside risks to the bloc’s economy had diminished and its economic recovery picked up pace.” (CNBC)
- Fund managers are now seeing Europe as the next place to invest and you should look at this from Paul Moore of PM Capital, who has gone long a Spanish bank and a developer in Ireland!
- In the US, March quarter profits continue to surprise on the upside. About 54% of companies have reported, with 81% beating on earnings and 65% beating on sales. Earnings are up 12% year-on-year and on track for the fourth quarterly gain to new record highs.
- Donald Trump’s revealed tax plan this week was a positive and, if it gets up, it will take stock prices higher. “The tax plan provided few surprises: a reduction in the corporate tax rate to 15% (from 35%); a one-off tax on repatriated cash earnings (of 10%); no border adjustment tax (it’s just too hard); collapsing the personal tax brackets from seven to just three of 12%, 25% and 33% (with the current top bracket being 39.6%); doubling the tax free threshold to $US24,000; and cutting itemized deductions.” (Shane Oliver, AMP)
- The handling of North Korea and Syria looks less worrying.
- The first quarter GDP growth number for the USA of 0.7% instead of the expected 1.2% has hosed down expectations of three more interest rate rises this year. However, this is a doubled-edged sword, as the lower-than-expected number could raise question marks about the economy’s overall growth in 2017.
On that negative, it’s worthwhile throwing in that China’s April manufacturing number was out over the weekend, and it slowed faster than expected. It came in at 51.2, which still says the sector is expanding but at a slower rate. The March figure was 51.8.
The general view is that China, which grew at a better-than-expected 6.9% in the first quarter, will start to slow down over 2017.
“China’s economy grew a faster-than-expected 6.9% in the first quarter, boosted by higher government infrastructure spending and the nation’s gravity-defying property boom,” Reuters reported. “But growth is expected to slow as authorities step up a battle to cool the property sector and as the central bank and banking regulator take steps to contain financial risks.”
The above explains why iron ore prices have been sinking in recent weeks.
Meanwhile, the UK is not helping the case for optimists, who want to believe that stocks won’t sell off this May to October. The UK economy grew by just 0.3% at the start of the year, the slowest growth rate since the first three months of 2016.
Chris Williamson, chief economist, IHS Markit, said: “The message is clear: the start of the year saw the weakest pace of growth for a year as rising prices have started to hit household spending.” (BBC)
Despite all this negative stuff, AMP Capital’s Shane Oliver still thinks we are in a “risk on” situation now!
“The past week saw “risk on” following the outcome of the first round of the French election and in anticipation of President Trump’s tax plan. Mostly good economic and earnings news helped too. This saw most share markets rise, led by Europe, but Chinese shares dipped on news of tighter financial regulation.
“Australian shares had another push towards the 6000 level. Reflecting the ‘risk on’ tone, bond yields rose in core countries but fell sharply in France.”
What do I think?
I suspect with weakening economic data we could be susceptible to a sell off but I can’t see it being a deep one. This week’s FOMC meeting of the Fed on interest rates will be important and so will US economic data, which, until the GDP number, was pretty good.
The big risk is Trump and his tax plan. If the Congress trumps him like it did with his health plan, then stock markets could de-risk but if he pulls something significant off, then we are off to the races before St. Leger’s Day.
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