Seasonal trends could be a drag on a stock market that needs a rebound
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Traders are seen working on the New York Stock Exchange’s floor (NYSE) in New York City on April 25, 2022.
Spencer Platt | Getty Images
Investors may be hoping for some relief after the worst month of stocks in over two years. But the calendar could not become too friendlier.
Rising interest ratesSome high-profile earnings missesThere are burgeoning worries about global growthThe stock market took some damage in April.
This big drawdown occurs on the heels of an historically low stock market. The “sell in May, go away” mentality officially begins next week. The Stock Traders Almanac states that an investor who owned the Dow Jones Industrial Average from Nov. 1, through April 30, then changed to fixed income over the six-month period would have earned solid returns and reduced risk over the past seven decades.
According to Sam Stovall (chief investment strategist, CFRA), seasonal weakness may be more pronounced during midterm elections.
Sometimes it pays to make gains in advance of traditionally difficult May-through October periods. Mid-term election year, otherwise known as “sophomoreslumps”, is a prime example. Indeed, since 1992, the S&P 500 fell an average 3.4% in the May-through-October period of mid-term election years,” Stovall said in a note to clients Monday.
Jumping to fixed income might not be the smartest decision, even though it seems simple.
Stovall stated that cashing out may not be the best choice. Equal exposure to defensive consumer staples, and the health care sector from May through Oct outpaced the benchmark 100 percent of these years and showed an average 6-month total return 5.6%.”
Are May sales early or late?
Stovall has highlighted that certain defensive areas have outperformed in the past weeks.
What about tech, which is in decline for almost six months? A number of metrics and market actions suggest that the selling has not been enough.
“Regardless of the fact that the market has been sold, it is clear Tech is in dire need of a rebound. Meta and Microsoft both have seen a reversal from their respective 50 day averages. These are key points,” Frank Gretz (a Wellington Shields technical analyst) said to clients in a Friday note.
You could be right that the trend of selling-in-May started quite early in 2022.
However, valuations in some markets remain high.
When adjusted for stock-based compensation, the free cash flow yields of median Tech and Communication Services companies are less than those in the general market and other defensive sectors. “This suggests that current Tech valuation is not supported by cash flow,” Chris Senyek, Wolfe Research, stated in a Friday note.
Fed meeting ahead
A Federal Reserve meeting this week may break any seasonal trends. On Wednesday, the Federal Reserve will release an updated policy statement and then hold a press conference with Chair Jerome Powell.
Although the market has priced in a rate increase of 50 basis points on Wednesday, recent Fed speakers indicated that they are becoming more aggressive about fighting inflation.
The question is, “What will the Fed do?” Quincy Krosby is chief equity strategist at LPL Financial.
One term that has come up in recent weeks is “front loading” — the potential for the Fed to do multiple 50-basis point or higher hikes in the months ahead to get close to or even above the supposed neutral policy rate.
The following is an extract from the CME FedWatch toolTraders see the Fed Funds Rate potentially increasing to 3% by the end the year.
At this time, they have the advantage of an extremely strong labor market. Krosby suggested that they should go into the market and use it as much as possible to try and slow down demand.
Investors will receive key data on the labor market from the Fed Wednesday. This includes nonfarm payrolls and jobless claims Thursday.
After a surprising negative quarter-end GDP, the monthly jobs report April may get more attention this week. While the drop was mostly due to declines in inventory and export numbers, traders and money mangers are keeping an eye out for signs that there is economic instability in the U.S.
Event Calendar
Monday, May 2.
Earnings:Moody’s. Nutrien. NXP Semiconductors N.V. Williams Companies. Devon Energy. Arista Networks. Expedia. Mood’s. Moody’s. Moody’s. Moody’s.
9:45 am. Markit Manufacturing PMI
10:00 AM Construction Spending, ISM Manufacturing
Tuesday, May 3
Earnings: Pfizer, Estee Lauder, Advanced Micro Devices, S&P Global, BP, Airbnb, Starbucks, Illinois Tool Works, AIG, Marathon Petroleum, Hilton, Biogen, Match Group, Paramount Global, Restaurant Brands, Lyft
10:00 a.m. Durable orders and Factory orders are available at 10:00 am.
Wednesday, May 4
Earnings: CVS Health, Booking Holdings, Regeneron, Uber, Marriott, Moderna, Pioneer Natural Resources, Fortinet, Ferrari, Yum Brands
8:30 a.m. Trade balance
9.45 am. Markit Services and Composite PMI
10:00 a.m. ISM Manufacturing
2:20 p.m. Statement release by the FOMC
Jerome Powell press conference at 2:20 p.m.
Thursday May 5
Earnings:Royal Dutch Shell. ConocoPhillips. Anheuser-Busch. Zoetis. Becton Dickinson. Vertex. Dominion. Block. Shopify. Illumina. Monster Beverage. MercadoLibre.
8:30 AM Jobless claims, Labor Market Productivity and Unit Costs
Friday, May 6,
Earnings: Cigna, Icahn Enterprises, Formula One Group, NRG Energy, DraftKings
8:30 a.m. Nonfarm payrolls Report
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