Sell in May and go away?

4 May, 2020

This question never gets old. Shall we "sell in May and go away"? Investors who got out of the market for just the month of May, over the past 11 years since the greatest bull market started, would have outperformed the S&P 500 ‘buy and hold’ strategy by more than 7%.  Despite the fact that the call was only correct four out of eleven times, the losses during the months of May were way larger than the gains made, with the largest decline in 2010 of 8.2%.

The bad start to the month of May is raising concerns that the recovery seen since March 24 will prove to be a temporary one, or as traders like to call it, ’a dead cat bounce’. The S&P 500 declined 2.8% on Friday, and equity futures are indicating a negative start to the week. While this does not necessarily mean that another selloff is coming, investors need to be carefully watching the upcoming events.

On Covid-19 related news, states across the US are taking steps to restart the economy by easing stay-at- home orders and allowing non-essential businesses to reopen. That is a similar process to what we have seen across many European nations. These steps of reviving the economy are coming as data from the Johns Hopkins Coronavirus Resource Centre show that coronavirus deaths continue to climb, bringing the total number of fatalities across the globe to more than 66,000.

The next two to three weeks are going to be extremely critical on two fronts: health and the economy. No one knows with a high degree of certainty how the Covid-19 curve will play out. While we all hope it slopes downwards, there is no guarantee it will, especially with lockdown periods coming to an end. If cases begin to grow and the curve steepens, the chances are high of returning to another phase of complete shutdown. That would put economies on freeze again and the only direction for stocks to head then is down.

The other risk factor is a new trade war between the US and China, which is the last thing investors want to hear at this stage. However, President Trump has already threatened to impose tariffs on the world’s second-largest economy as he raised the prospect that China deliberately caused the Covid-19 outbreak. US Secretary of State, Mike Pompeo, claimed yesterday that there is a lot of evidence pointing to the virus outbreak originating in a Chinese laboratory. Such statements indicate that Sino-American relations are about to get worse. So, a close eye should be kept on how the situation between the two countries develops.

On the data front, global manufacturing and services PMIs will provide a short-term picture of how companies are coping with the current challenging times and whether we will see any improvement in their outlook, given the relaxation of lockdown measures. Thursday’s import and export data from China will be of extreme importance as they reflect how the lockdown has impacted the world’s supply and demand.

We close the week with the most critical data for the US on Friday, with the monthly jobs report. Expectations are for the US to have lost 21 million jobs and unemployment to jump from 4.4% to 16%. That is 6% beyond the peak unemployment rate of the 2008 financial crisis and can only be compared to the great depression of the 1930s.

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