It's May. Now what?

It's now May.   The straight-line drop in risky assets that opened the year seems like a long time ago, at least if you look at most market prices.  That being said, it seems quite clear that the episode remains fresh in the memories of policy-makers- or at least the ostensible catalyst for the risk-asset downdraft.

Nevertheless,  equities may finally being showing some signs of rolling over.  While it's true that nearly three-quarters of SPX companies have beaten EPS estimates, it's also the case that those earnings have declined more than 7% y/y.  With stocks still much closer to the highs of the range than the lows, Macro Man will let readers conclude for themselves which of these factors is most in the price.

Will the onset of May herald a continuation of the nascent weakness observed last week, or is "sell in May and go away" just a trite cliche at this point?  Only time will tell for certain, of course, but we can still assess the balance of probability using whatever facts we deem appropriate.    Insofar as the "sell in May" aphorism is really just a comment on seasonality, Macro Man thought that it might be useful to revisit monthly returns for the SPX across a broad range of time frames.    Here are monthly returns for the SPX since 2009 (the QE era):

As you can see, there are some pretty chunky average returns there....but May and June are both negative, which would argue for caution.   What if we extend back to 2000?

Well, on average May is positive (barely), but does indeed usher in a period of lousy performance extending through the summer.   Again, not exactly a ringing endorsement for buying (or holding) spec longs here.    Going back to the start of the long secular bull market in 1982:

In this case, the average return for May is actually slightly above average, but again the returns for June through September are lousy.   Going back to 1950, which is an arbitrarily chosen date that roughly coincides with the official beginning of the S&P 500:

Again, May's return is slightly positive on a nominal basis but ushers in a summer of generally poor performance.  Finally, the data since 1928, the beginning of the dataset:

Interestingly, the June-August period now looks OK, while May is back negative on average.  How much you want to distill from the monthly returns during the Depression and the war is up to you...but what Macro Man can say is that May has delivered below-average returns for four of these five time windows, and May-September has done so for each of them.

Given that this is an election year and that the campaign is already incredibly depressing  (both of the front runners have approval ratings well below 50%), it may be useful to observe the seasonals for election years as well.  As a reminder, election years have generally performed in line with the non-election years; since 1928, the monthly average return for the former is 0.46% and for the latter, 0.45%.  Still, what's interesting for the purposes of May 2nd is the monthly breakdown:

May is by far the worst performing month...though in contrast to non-election years, June though August perform very well indeed.   Now, perhaps you might want to argue that the sample size behind this chart is too small to draw any substantive inferences from the average monthly returns.   And you'd probably be right.

But still, in the context of negative seasonality with a much larger sample, lousy earnings, waning momentum, and prices still close to their highs....let's just say that Macro Man isn't covering his (slightly offside) tactical short just yet.

Switching gears back to the dollar, the potential Portuguese downgrade did not materialize in the end, with DBRS deciding that the country remains investment-grade (again, judge for yourselves what they says about the utility of bond ratings).  Nevertheless, the decision has removed one potential headwind from further gains in EUR/USD.  Although Macro Man didn't comment on it last Friday, the release of Q1 GDP in the Eurozone was really quite stunning, with the region registering its second highest quarterly growth rate of the last five years.  More interestingly, European growth bested that of the US for just the fifth time this decade.

Taking a step back, it's not hard to ague that recent dollar weakness is justified (or, perhaps to put it another way, that prior dollar strength may have been a little overcooked.)  It's interesting to note, for example, that the 10 year FX forward points have essentially gone nowhere for the last three years (albeit with plenty of swings and roundabouts) even as USD/JPY raced from 100 to 125.....and now, perhaps, back to 100.

Similarly, long dated EUR/USD forwards haven't really moved that much over the last couple of years; in fact, they hit their most dollar-advantageous levels more than 18 months ago.  To be sure, EUR/USD hasn't always moved one-for-one with long-dated forwards..though if anything, the former has led the euro.  Either way, it's hard to avoid the conclusion that on some measures at least, the dollar's interest rate advantage hasn't really grown despite the imposition of NIRP and ECB QE2.

Again, none of this necessarily means that the dollar must weaken from here....but it does suggest that on current pricing, the interest rate case for a rebound is less than compelling.   And that leaves the FX determination to positioning and narrative.  You'd have to think that longer-term longs are getting a bit antsy about the dollar given its shoddy performance; hell, even the GPIF is talking about hedging!  Meanwhile, the narrative is in the Fed's court.   But with Kaplan already citing the Brexit vote as an excuse to sit on their hands, it's very hard to see the Fed driving the narrative to a more dollar positive tone barring a stunning recovery in the data.

Perhaps "sell in May" doesn't just apply to the stock market these days?