May continues to be a disappointment for investors, with the S&P 500 down again this week. The idea that trade and tariff disputes could begin to impact the global economy meaningfully has gained traction. Those following the adage to “Sell in May and Go Away” are feeling quite clever right now. However, market timing of this sort is more luck than skill, so count your blessings and get back in the market. Opportunities are opening up in Value, Small Cap, and International stocks, in our opinion.
Headlines This Week
Trade and Tariffs:
- The U.S. administration said that Mexico needs to stop illegal immigration that flows through the U.S. and Mexican borders; threatening to increase tariffs up to 25% by the end of October if Mexico does not act swiftly to resolve illegal border crossing.
- The slowdown in Chinese manufacturing is confirming investor’s worry about the impact of U.S. tariffs on the Chinese economy. The U.S. administration reiterated their tough stance on China, warning that tariffs could double if trade issues are not resolved.
- On the positive side, U.S. and Japan trade talks started on an upbeat note and might produce a quick turnaround on a trade deal. The main goal of the agreement is to reduce the trade deficit between the two close allies.
U.S. Treasury yields fell lower as risk aversion kicked in, dragging the yield curve deeper into inversion with the 10-year slipping below short rates. An inversion happens when short-term yields, are higher than long-term yields. This has traditionally signaled a possible recession on the horizon if proper actions on fiscal and monetary policies are not undertaken.
Despite the heightened worries about the growth of the global economy, U.S. consumer confidence remains high. For the consumer, the U.S. economy still feels robust, contradicting other trusted economic guides, especially inversion signals from fixed income markets.
Sell in May and Go Away
There is an old saying in investments, “Sell in May and go away.” The idea is that for some mystical reason, stock markets systematically underperform from May through October… so when April ends, get out! This phenomenon is a classic case of small sample size and data mining and has no more academic backing than the Super Bowl Indicator which states that the market does well in a year that an NFC team wins the big game. Yet, this year selling in May would have been quite fortuitous with stocks down over 6 percent! If for some reason you did sell in May, 1) stop trying to time the market… it may have worked this time, but you will get burned in the long-run, and 2) consider getting back in the market at a level that is appropriate for your long-term risk tolerance. The latest pullback is beginning to open up opportunities in Small Cap, Value, and International Stocks.
The Week Ahead
We will be watching the Institute of Supply Management (ISM) Manufacturing report and Total Vehicle sales report.
Our focus will center on a speech from Federal Reserve Chairman Powell in Chicago as part of the Conference on Monetary Policy Strategy, Tools, and Communication Practices.
We have the Beige Book release, Non-Manufacturing ISM report, and ADP Employment Change report, which give us insight into what to expect on Friday.
We will shift focus across the pond as The European Union has a read on first-quarter GDP and a rate decision from the European Central Bank followed by a press conference from President Mario Draghi.
We receive the much anticipated monthly “Jobs Report,” technically called the Non-Farm Payroll report.
Stock Highlights from Max
Melee in May
With a continued drop in interest rates, it should not be surprising that the best sectors were the high yielding Utilities and REIT sectors. Notably, Health Care was able to grind out a positive month, despite the unfavorable market. Energy was the worst performer in May, as crude prices declined double-digits. Consumer Discretionary was next to last, but avoided the bottom spot with a tremendous earnings report this week from…
- William-Sonoma (WSM) reported a smoking hot quarter this week. The retailer of home goods crushed analyst expectations on both sales and earnings. The company served up a boost to full-year guidance as well. Overall, comparable sales growth of 3.5% came in better than expected, with all units topping expectations. The West Elm brand increased comps by over 10% in the quarter as well.
- Also, in the retail space, Ulta Beauty, Inc. (ULTA) reported earnings that beat expectations but failed to impress, with a slight miss on comparable-sales. The company still expects to grow revenue by low double-digits this year.
- In other news, NXP Semiconductors N.V. (NXPI) announced a $1.73 Billion acquisition this week. Taking advantage of weakness in microchip companies, NXP purchased connectivity assets from Marvell Technologies (MRVL) to help augment NXP internet of things (IoT) footprint (no connection to Disney’s Marvel franchise).
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||-2.8||8.9|
|Russell 2000 (Small Cap)||-3.2||8.6|
|MSCI EAFE (Developed International)||-1.5||6.2|
|MSCI Emerging Markets||0.8||3|
|S&P GSCI (Commodities)||-1.2||12.7|
|MSCI U.S. REIT Index||-1.6||15|
|Barclays Int Govt Credit||0.7||2.9|
|Barclays US TIPS||1.2||5.2|
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