10th May 2021
Sell in May and go away?
The traditional stock market adage of ‘sell in May and go away’ is back in vogue again this year, after the first four months of 2021 brought healthy returns to investors with equity exposure. Of course, historic return observations have rarely been good predictors of future returns, and this year has hardly followed the traditional pattern. May has made an encouraging start, with stock markets only briefly spooked by former US Fed Chair Janet Yellen’s prediction that yields would likely have to rise to prevent economic overheating. However, overheating fears might have cooled slightly, after the announcement on Friday that the US labour market added just 266,000 jobs last month, compared to the 770,000 new jobs added in March. Some analysts were expecting the new jobs number to reach one million.
A broadening recovery – April 2021 in review
After the fairly volatile first quarter, April brought more decisively positive stock market returns, while bonds paused their losing streak. The main April takeaways for investors were threefold. First, improving economic sentiment would no longer push up bond yields, therefore easing the competition for sources of yield that had become the main headwind for equities in the first quarter. Second, strongly rising commodity prices and annual corporate earnings growth touching 50% provided solid evidence that recent equity market optimism had an increasingly solid base in the real economy. Third, the regional picture remains changeable, with Europe no longer significantly trailing the US, whereas last year’s regional darlings in East Asia (especially the Chinese and Japanese markets) have become this year’s laggards.
The UK bounces back – or is it all just politics?
There has been a great political awakening across the world in recent years. The issues of the day have become visceral divisions. These arguments have had significant impacts on all aspects of our lives, including capital markets.
In the UK, this has been most evidently played out in the great Brexit drama which, aside from its impacts on foreign investment and asset valuations, has been the main driving force behind the value of Sterling.
The government assures us that Brexit is now a settled affair (Jersey fishing rows, Northern Ireland’s trade position and ongoing negotiations about the services sector notwithstanding). Therefore, market commentators have turned their attention towards a familiar political story: devolution and the potential break-up of the Union. Last week, Britain headed into elections that might have some meaningful impact in that respect.
Inflation is the watchword in capital markets these days. With vaccines rolling out across the developed world, and policymakers pouring trillions in stimulus into their economies, investors are expecting rapid growth for the rest of this year and beyond. Those heightened growth expectations have brought expectations of rising prices with them. Nowhere is this truer than in the US, where several multi-trillion Dollar fiscal packages are coming into force, while the Fed is keeping monetary policy at historically loose levels, and just as the economy opens up again. All of this has led to markets expecting growth and inflation to be supercharged when the pandemic eases.