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Investment Strategy

Sell in May?

By Elliott H. Gue, on Apr. 27, 2016

On April 22, the S&P 500’s current bull market surpassed the 1949-1956 run to become the second-longest in history, trailing only the tech-driven rally in the 1990s. Of course, backward-looking achievements of this nature have little import for investors; the bigger question is whether this run-up has staying power or is on its last legs.

The US economy continues to grow at a lackluster pace, first-quarter earnings have disappointed and the S&P 500 trades at stretched valuations. Although none of these factors preclude additional upside in US equities over the near term, we stand by our cautious outlook for the broader market and prefer to focus on defense.

Market commentators often focus on the development of bubbles and their inevitable bursting, as these actions tend to drive dislocations in the economy and stock market. Investors shouldn’t overlook the effects of an extended period of extraordinarily accommodative monetary policy, headlined by near-zero and negative interest rates.

The fortunes of the S&P 500 and global equity indexes increasingly depend on central banks’ commitment to reducing borrowing costs in an effort to stimulate economic growth.

Consider that the S&P 500 sold off hard when the Federal Reserve talked up the potential for several rate increases this year and rebounded when Chairwoman Janet Yellen indicated that economic weakness and other concerns would likely force the central bank to scale back these plans.

US gross domestic product (GDP) expanded at an annualized pace of 1.4 percent in the fourth quarter of 2016. At the end of last year, Wall Street’s hive mind called for economic growth to accelerate to 2.5 percent in 2016.

Developments on the ground suggestion that this consensus estimate will need to be revised lower.

The Federal Reserve Bank of Atlanta’s GDPNow model—an indicator that boasts a superior track record to the Wall Street consensus estimate in recent years—suggests that the US economy grew by 0.3 percent in the first quarter.

Meanwhile, the Federal Reserve Bank of New York’s recently launched Nowcasting Report estimates that US GDP grew by 0.8 percent in the first quarter and 1.2 percent in the second quarter.

Stories in the financial media have highlighted signs of improvement in the US economy, but digging beneath the headline numbers reveals a modest stabilization, at best.

Running the Numbers 

The Institute for Supply Management’s Purchasing Managers Index (PMI) for US manufacturing industries tumbled to a low of 48 in December 2015 from its summer 2014 peak of 58.1.

PMI values greater than 58 usually c

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