Can positive economic trends overcome the weight of market seasonality?
We all love simple rules, especially when supported by data. Throw in a rhyme or some alliteration and you have the makings of a powerful slogan. “Sell in May and go away” fits the bill.
Despite the biggest flow of fresh news and data we have seen in recent memory, I expect the financial punditry to repeat the rhyme and ask that question to anyone willing to step in front of a microphone.
Prior Theme Recap
Last week I expected the theme to be economic optimism. There were several stories on that subject early in the week. It played out pretty well until the release of the new home sales data. That caused most to reconsider. Despite that, the balance of news and corporate reports were upbeat on the economy.
As I try to emphasize, forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.
Naturally we would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.
This Week’s Theme
Is it time to “Sell in May?”
There are many articles on this subject, but charts like this one (from Sam Ro at Business Insider) highlight the seasonal difference:
We’ll let that chart stand for a thousand words!
If you insist on more detail, you can find scores of articles that suggest that this is the exact moment for many bearish predictions to come true – “only pain ahead.”
On the positive side, there are five important trends suggesting solid economic improvement:
- Less economic uncertainty. Remember all of the complaints that business was reluctant to expand because of unpredictable government policies? That has gotten better. Fivethirtyeight has a nice update article in an objective indicator, the economic policy uncertainty index.
- Corporations are finally putting cash to work (via Bloomberg) although it is only a start (via Scott Grannis).
- Expected earnings growth remains strong. Brian Gilmartin provides regular updates of the growth in the forward estimate, now 7.68%.
- US oil production is surging, up 67% in four years. Scott Grannis calls this a “huge boost for the US economy.”
- Business economists see improved hiring. These are not Wall Street economists or academics (although their message is similarly upbeat). These are corporate economists offering evidence about their own business or sector. This is the best kind of survey. Josh Brown has a nice discussion, noting that we have had four annual “false starts” toward the elusive goal of economic “escape velocity.”
How much of an anchor will seasonal forces provide? Will economic progress be reflected in stock prices?
As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.
Last Week’s Data
Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:
