May – “Sell in May and go away”
The centuries old saying once again proved to be more of a myth than reality. In fact, statistically speaking, the saying should be “Sell in September…”.
May was indeed a very good month, almost making up for the negative performance of April. If there is one piece of investment wisdom that is proven and tested, it is to stick to the strategy, stay invested and not overreact to the short-term volatility and news flow.
We previously mentioned cocoa as a hot commodity, but coffee and most industrial metals are having a great run so far this year. Gold also continues its upward trend.
Data source : Bloomberg
We witnessed a spectacular rebound on the Nasdaq at + 6.9%, and the IT sector coming out strongly out of the Q1 earnings season. There were also positive macro news, which helped equity markets this month. Namely the US composite PMI surging up, largely driven by services. Logically speaking, this should favor healthy growth ahead. Other news were less positive. Inflation rate (CPI) remains unchanged year-on-year, core inflation is marginally down, and PCE inflation, the Fed’s favored measure, is also unchanged (2.7%). It is getting to a point where investors are digging so deep for clues that we start seeing the previously rarely used figure of super-core inflation (basically services minus a few components). Well, all this is supporting the thesis of higher rates for longer. The market is now pricing 2 rate cuts in Q4 2024, a far cry from 7 cuts for the year priced in at the end of last year by the market.
In Europe, growth is marginally positive on the back of slightly improving PMI figures. Inflation, on the other hand, is up from 2.4% to 2.6% year-on-year. While the market already priced in a 25 basis point rate cut at the June 6 ECB meeting, this latest reading on inflation and the fact that the Fed hasn’t acted yet, could justify the central bank to maybe decrease the reference rate as previously considered but postponing further awaited rate cuts. Despite the weak actual and expected growth in the region, the stock market is still performing on par with the US and faring better than the MSCI World index.
China continues to experience economic struggles, from a slump in real estate to exports, with the commercial war with the US continuing to hurt. If we add the geopolitical risk associated with the country, staying away in terms of investments was the right call.
Our summary recommendations
In a month that saw heightened tensions in various regions (Middle East, Eastern Europe, South Asia), our call at the beginning of the year to be extra cautious of geopolitics still stands for the rest of the year.
With that being said, we recommend staying invested but be more selective on the region of exposure, the quality of the underlying investment, the level of downside protection and the decorrelation to black swan events.
This can be achieved by holding high quality and low duration bonds (2-3 years), maintaining exposure to equities via a long position in developed markets and structured products with downside protection. Finally, alternative investments can be a great source of steady return with lower volatility.
Chart of the month
The chart of the month shows the excess savings calculated as the accumulated difference in actual de-annualized personal savings and the trend implied by data for the 48 months leading up to the first month of the 2020 recession as defined by the National Bureau of Economic Research.
This does not mean that the American consumer is out of savings, it just means that the abnormal accumulation of savings that peaked during Covid is completely gone, and they are now taping into other sources of savings or credit card as a source of spending. This is one of the reasons why growth has slowed in the US in the first quarter, though remains positive.
The impact can already be seen, as 9% of credit card debt were made delinquent in Q1 2024, while 8% of auto-loans moved into delinquent status in the same period.
Source: Federal Reserve Bank of San Francisco, Bureau of Economic Analysis
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