by By Eleftherias Kourtalis
The resilience shown by the markets, despite the jitters caused by the March banking shocks, could be tested next time around. The question that worries the investment community every year at this time is whether the stock market saying “Sell in May and leave” will be verified. The phrase refers to a stock market strategy based on the theory that the market underperforms the six-month period between May and October (the saying continues “…and come back on St. Leger’s Day” which is the end of September) .
Statistically, the amounts invested in the markets from November to April tend to outperform the amounts invested from May to October, while the corrections tend to be greater during the periods of selling in May. As Bank of America analysts note, seasonality since 1928 shows that May through October average returns are the lowest of all six months of the year, with the S&P 500 rising 65% of the time for an average return. 2.16%.
However, the Sell in May strategy does not always work. In contrast, the market hold strategy has outperformed the US market in recent years, for example. “Average returns over the six month period are not negative and although May may be a weak month if someone sells in May and exits the market, they could miss a summer rally,” adds BofA.
And historically, there have been many periods where the May sell-off didn’t work out and the markets rallied. 2020 and 2021 were examples where massive Federal Reserve interventions pushed prices higher in April and the following summer months. However, the opposite happened in 2022 as markets fell sharply in April as the Fed launched an aggressive rate hike campaign the previous month.
As April draws to a close, the question is, will 2023 be another year where the “Sell in May” strategy will work or not? While no one knows the answer, historical statistics, current economic indicators, and technical metrics suggest some caution is in order. After all, the international investment houses in their new reports on market developments are expressing their caution and pointing out that the rally does not have much room to continue in the next period.
JP Morgan: The “bottom” of the markets has not yet been marked
The first quarter earnings season has started with some positive surprises and there may be more to come. But that shouldn’t be taken as a sign of stronger stock performance, analysts at JPMorgan said. It was easy for companies to beat weak earnings expectations, while the numbers were also boosted by better economic activity than in the first quarter of 2022, analysts said.
“The question is whether stocks will rally further, supported by these results,” analysts at the US bank said. “We advise you to use any strength of the positive first quarter results as a good level to reduce your positions,” they add.
To be bullish on equities at this point, you need to have a very bullish set of assumptions about growth/rates/China/politics etc., JP Morgan points out. All of this contributes to his view that stocks are likely to weaken for the rest of the year. JPM was bullish on the stock in Q4 2022 and we expected the upside to extend into Q1 2023, and believe the wisest strategy is to be underweight going forward.
“exist” in the second half of 2023.
“At the start of the year, the markets continued to have a supportive and resilient economic environment on their side, but now all the support has ‘expired,'” he points out. We advise you to use them as an opportunity to liquidate more. your positions,” says JP Morgan. “We are unlikely to see the bottom of the markets before the Fed has already reversed its position and made interest rate cuts,” he said.
Citi: Beware of declining profitability
Citi economists expect the United States to enter a recession in the fourth quarter of 2023. Even if European GDP exceeds that of the United States, European equities and the profitability of European companies will be under pressure, stresses t -he. While the worst of the recent banking turmoil is likely behind us, he still forecasts subdued global growth, with heightened risks of ultra-low growth. Even in the positive scenario, the United States is on the verge of entering a recession, which will have a significant negative impact on global equities, with Europe at the center, he believes.
Even if US and European GDPs do not move at the same pace, the earnings per share (EPS) of listed companies can, Citi points out. European companies have become more international and profits are increasingly correlated with those of American companies. In particular, a quarter of the turnover of European companies now comes from North America, with some industries reaching up to 50%.
Over the past three decades, Europe has never avoided a contraction in EPS around a recession in US EPS. And, specifically, Citi finds that during a quarterly contraction in US EPS, there is a 70% chance that the European market will also experience a decline in EPS in the same quarter. Simply put, Europe will struggle to avoid being hit by a contraction in US EPS, as Citi points out.
Citi therefore still prefers US equities to European equities. As he points out, the US tends to behave more defensively than other markets during earnings downturns, with the S&P 500 outperforming the Stoxx 600 in each of the last six major US EPS declines. This is a key reason for Citi’s recent overweight in the US stock market and Europe’s downgrade to neutral.
SocGen: limited room for market upside
The European stock market has fully recovered from the March sell-off and is now trading even higher than in February, Societe Generale notes. However, looking at the European market, it seems that the rise is due to defensive stocks rather than cyclical stocks. Since early February, low beta sectors have generally outperformed high beta sectors, despite a slightly bullish market. A bull market led by defensive stocks is nothing new, as it has happened a dozen times over the past decade, but this is the first time since the start of 2020, just before COVID.
What does that mean; SocGen points out that the outperformance of equities and defensive sectors essentially reflects investors’ lack of confidence in the current economic cycle and the outlook for the economy. The market has also probably already priced in too much good news (opening of China, no energy disruption in Europe, etc.).
While SocGen recommended positions in cyclical stocks in the second half of 2022 and early 2023, it changed its position in mid-February, reducing its exposure to these assets. At the time, his models showed that after cyclical stocks outperformed between June 2022 and February 2023, markets no longer priced in a contraction in the economy and valuations between cyclical and defensive stocks had normalized. The recent underperformance of cyclical stocks has not altered the overall valuation picture, and the new Eurozone manufacturing PMI data (at 45.5 points) does not encourage a rush into cyclicals.
Based on the above, the French bank underlines that it does not see any further significant upside across the whole of the European market before the end of 2023, as the market is correctly priced, and it does not expect that the profitability of companies in 2023 increases. He does, however, see investment opportunities in value stocks in Europe, which have lagged and could benefit from higher interest rates and a resilient macro backdrop.
BofA: “Sees” diving in Europe at the start of Q4
Bank of America maintains its negative positioning on European equities and maintains an underweight recommendation on cyclicals compared to defensives. “Our expectation of weaker growth and widening risk premia is consistent with a 20% drop in the Stoxx 600 to 365 points by the start of the fourth quarter,” the US bank said. His macro forecast, he adds, is also consistent with a 10% underperformance for cyclical stocks versus defensive stocks and value stocks versus growth stocks. His favorite defensive sectors are food, beverages and pharmaceuticals, while large underweights are banks and autos.
The recent BofA survey of fund managers shows that the majority of investors are now bearish on European equities. In particular, 70% of investors anticipate a downward trend in the European market in the coming months in response to monetary tightening, and 55% foresee a decline in the next twelve months. Persistent inflation leading to further central bank tightening is seen as the most likely cause of a correction (30% of respondents), followed by weakening macro data (25%). 38% see the lack of defensive hedging strategies as the main risk to their portfolio, although 25% fear that if they reduce their equity exposure too much, they could miss out on the continued recovery.
Meanwhile, 75% of fund managers believe growth in Europe will weaken over the next 12 months in response to monetary tightening, while the percentage expecting a recession ranges between 55% and 60 %. Overall, 63% predict a slowdown over the next twelve months, with 48% expecting a recession in the global economy.
Additionally, 58% expect falling demand in response to deteriorating credit conditions to be the dominant macroeconomic theme in the coming months, leading to: (a) growing recession risks, (b) a weakening of inflation, (c) a spike in central bank aggressiveness, and (d) lower bond yields.
