Sell In May and Go Away | Episode 132 | 05-13-24

With the warm breeze of summer comes a wave of economic changes that could impact investors worldwide. Megan discusses the intricacies of the financial market during these potentially turbulent times and dissects the myth of "Sell in May and Go Away," scrutinizing the S&P 500's historical summer performance, especially in the face of current market volatility.

She discusses the nuances of inflation concerns and the implications of the burgeoning budget deficit. With the presidential election, political shifts could significantly sway market dynamics. This isn't just about trends; it's an understanding of the forces that could shape your investment strategies in the coming months.

Megan explores the potential for valuation corrections in an overstretched market and the possibility that tariff discussions that could sway investor confidence. With crucial economic data on the horizon, including consumer retail sales and pivotal inflation reports, she provides actionable insights to help you stay one step ahead.

This episode also touches on the Federal Reserve's response to inflation, which has become a growing concern as consumer expectations increase. Megan discusses the alarming budget deficit, projected to approach one and a half to two trillion dollars, which could reach nearly seven percent of GDP. This is particularly concerning during a period where the economy is still expanding. How the government plans to finance this deficit is a question that looms large, with the Treasury's quarterly refunding announcement being a critical event to watch.

The upcoming Democratic and Republican conventions also serve as a backdrop to the episode, marking the official kickoff of the election season.

Sell in May and go away. This is this age-old investment theory that in the summer months we tend to get quite volatile markets and very weak equity returns. This is Markets With Megan, we're here on Monday, May the 13th, and we're going to just go over our theme of the week. Which does this saying really have any validity nowadays? And, to be honest with you, it hasn't really over several, several years. The only thing that does come true when we look at history is back since 1945. If you look at the return of the S&P 500, it's not always negative in those summer months, but it is the weakest of the calendar year. When you look at the months of May to September, it's up on average about 2% and it's positive about 68% of the time. However, you get much bigger returns in those January to April and then that October to December time period. So that's why you tend to hear people talk about sell all your stocks and go away during the summer months. We can't guarantee that we're not going to see quite a bit of volatility this summer.

We're concerned about this summer for several things and really I'm just going to go over three or four of our main concerns right now. Inflation we continue to talk about inflation. This is a problem. This week, we're going to get a lot more inflation data, but when you look at whether it's been the inflation data we've seen in manufacturing or in services, and now the consumers are starting to get more nervous about inflation and their expectations are increasing this is a problem. This is a problem for the Federal Reserve.

The second thing is, you know we're going to start getting towards the election season for the presidential election, and the budget deficit is downright just. It's alarming for anybody. When you actually look at these data points, the deficit is approaching somewhere between one and a half and two trillion dollars. It is expected to go close to seven percent of GDP, which is unheard of, especially in a period where the economy is still expanding. So the one thing that we're going to be watching this summer, though, is how are we paying for this expansion in the budget deficit? Because the past couple quarterly refunding announcements which is where the Treasury gives us a kind of that heads up on how much they're going to have to issue in the forthcoming quarter these have kept pretty stable, but on July 31st, we'll get the next refunding announcement from the Treasury, and last year we got quite a bit of volatility, not only in bonds, but also in equities, when Janet Yellen, the Treasury Secretary, came out and had to increase the issuance that she had for her quarterly refunding Valuations in the equity market specifically the S&P 500,. Valuations in the equity market specifically the S&P 500, are stretched. We're looking at premiums up of 20%. When you look at a price-to-earnings multiple versus its history, this is where we can just plainly see a valuation correction, where people take chips off the table because of all of these uncertainties around the economy and around the Fed.

And then, lastly, the Democratic and Republican conventions will kick off this summer. The election is in full swing. We're going to start to get much more information from these candidates on what they're going to focus on when they come into office. If you have noticed, we've started to hear tariffs being thrown around a lot now from both sides of the party. This is something that we have to watch closely, because tariffs can sometimes be inflationary not all the time, but when we are in a situation where we're already walking that fine line with inflation. We got to be very careful there.

So all of these are many sources of reasons why we continue to be cautious on the markets hold that cash. We think that a 10% pullback in this market in the coming months, or at least before the end of this year, is highly likely. That's why we want to have that dry powder to put to work. We will be back this week because it is a lot of data. This week We've got data on the consumer, with retail sales and, as I mentioned, we'll get some of those key inflation reports as well.