April's Shower Might Bring May Flowers

April's Shower Might Bring May Flowers

May 08, 2024

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Last week was a virtual tug-o-war. There were economic indicators that talked about the growth of the economy, and inflation numbers that spoke to what would be the expected action of the Federal Reserve.

In the end, economic growth came in lower than expected at 1.6% annual growth vs. the expected 2.5% growth. Inflation showed no real signs of slowing except for the labor numbers on Friday, which were a bit on the slowing side. In the end, the S&P 500 seemed in a bit of a quandary. On the downside, support looked to be in the area of 4700-4800, and the upside seemed to have an initial target at the previous Friday's close at approximately 5123. It was said by many short-term market commentators that this was the expected range that was going to be monitored to see what should happen next. In the end, Friday was a terrific day, and Monday, although a bit less strong, showed no signs of weakness or giveback from Friday's move. 

Most of the indexes are trading right around their respective 50 DMA’s (Day Moving Averages), showing that quite possibly the April hiatus that the market took after its torrid five-month run might have been an approximately 4% pullback from the March highs and this could have been enough to recharge the markets for their next continuation move higher.

 

The old saying has always been, "Sell in May and go away." This is because the markets tend to have a quiet summertime. I suppose that this used to be because traders did much less during the hotter and vacation months of summer than periods from October to tax day in April, but nowadays things seem to run all year long and almost 24 hours a day. Still, looking at old-time statistics shows that May tends to be the beginning of a softer period. This is exactly what we have experienced the last two months and the first week of May, which looks pretty healthy to me:

 

Please take a moment to look at the first picture of what the S&P 500 has done for the entire last year, not just since March seen above. I find this valuable as it truly gives graphic recognition to how strong the five months straight up truly were from late October last year through March of this year. This seems to further validate why over the last two months I have been warning of an impending digestive period. Is this digestive period over? Was the April 4% decline at the end of this digestive period? We really won’t know till afterward, but as we look for breadcrumbs that lead us to what we should expect, the number one item that seems to be in focus is the inflation/interest rate issue.

Before I go into what could be expected going forward, I wanted to take a moment and further discuss a little more granular analysis of Fed Chair Powell's comments from last Wednesday. I also feel that earnings are an important issue to cover as these are the “facts” of what is happening with companies.  Given that 415 of the 500 companies in the S&P 500 had reported up until yesterday, I feel that we have a pretty good number to base expectations on.

The Fed decided to leave rates unchanged, and this has been the case for the last six Fed meetings. Yet, there were changes to Fed Chairman Powell’s public statement:

  • As expected, the Fed kept rates on hold with Chair Jay Powell highlighting a lack of further progress towards the 2% target in recent months.
    • While acknowledging the stickiness, he also noted a greater confidence in inflation heading towards 2%.
      • It might just take longer to get there. And as a result - higher for a little bit longer.
    • He noted that risks have moved towards better balance over the past year.
    • Regarding quantitative tapering, the Treasury redemption cap will fall to $25bln from $60bln. They are decreasing the rate at which they are pulling away the punchbowl, in effect signaling their concern about possibly instigating a recession.
    • All in all, this echoes what Fed officials have been saying for weeks now.

 In the end, he implied that there would probably be fewer rate cuts this year than expected due to the stubborn stickiness of the inflation measures, but that it is progressing in the direction he intends. The two measures that seem to depict this most graphically are the yield on the 10-year US Treasury and the price of oil. The yield talks to the market’s opinion on what the cost of money to borrowers should be and the price of oil reflects the current opinion on the geopolitical tensions in the Middle East.

 


To see graphically where we stand now as compared to the feared rampant inflation of the 1970's I am showing the US Misery Index. This is the rate of inflation Plus the Unemployment Rate. As can be seen, it is quite tame right now and not at levels we felt back in the 1970s:

As for earnings, I am including an updated chart from yesterday morning. As of yesterday, 415 of the 500 companies in the S&P 500 have reported, and of those, 80% have beaten estimates, and beaten those estimates by an average of 7.8%. I know this doesn't sound like a large beat, but if it continues, this clearly shows that corporate America is managing in a quite resilient fashion in the face of higher interest rates and inflation. This is of paramount importance as the key driver to the momentum in the equity markets is economic growth, and this clearly shows growth:

 

Suppose earnings are growing and inflation is slowly declining, even with rates remaining unchanged from the US Government's perspective. In that case, this should be a backdrop for an almost Goldilocks kind of environment. Considering that so far this year the first quarter market performance has been quite strong and the market is still in an uptrend, what happens in May when a strong first quarter is followed by a negative April? I know this seems a bit granular, but in looking at it there is a high degree of consistency. Here is the table of past occurrences going back almost 40 years:


In closing, I wanted to give an update on where we sit in the US Presidential Cycle. Normally the strong second-half rally into the election doesn't seem to get its motor started until the second half of May. If last Friday and the beginning of this week are any indication, the equity markets may not be enduring a "May Gray" or a "June Gloom." The market this year seems to be following the script pretty closely, and given a settling down of Geopolitical issues and inflation, we may be in for a pretty tasty summer. My friend Ari Wald put this study together with current updates this last weekend. Ari says very clearly, "Seasonals indicate the potential for market consolidation should be used opportunistically to buy stocks ahead of seasonal tailwind between June and August." Based on the action so far in May, this is where the current market stands relative to the historical average:

 

As always, we welcome any questions you may have about the markets, your portfolio, or a broader discussion concerning your situation. Please feel free to reach out and we will assist in any way we can. 


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