MONTHLY INVESTMENT OUTLOOK - by Cédric Ozazman, Nicolas Besson & Marco Bonaviri

Is the investment axiom “sell in May and go away” still applicable? This well-known financial world adage is based on the fact that summer months (between May and October) tend to be thinner in term of volume, exacerbating market moves, often to the downside. Contrary to conventional wisdom, when looking at the last seven years, the S&P 500 actually only endured a loss in 2015 (-1.3%) while the other years in this period showed average returns of +5.4% from May to October. By applying this strategy, the level of missed opportunities would have been high.

This year, there are good reasons to believe that a risk reduction among portfolios is wise. The global economic backdrop remains fragile and not as strong as last year. The positive Q1 US GDP growth looks good on the surface (3.2% vs 2.3% expected) and bolstered hopes that the US economy is on track to rebound after its recent soft patch. However, when drilling down into the details, the picture is not so rosy, with consumer spending only rising 1.2%, while business investment decelerated. Moreover, the main positive contributors were a rise in inventories and trade balance (downturn in imports), meaning that this trend should not continue into the coming quarters and can easily reverse. Weak indicators in the US manufacturing sector keep rolling in, with the ratio of new orders/inventories falling to the 2013 low (cf graph). If history is any guide, when reaching such a level, the fair value of the S&P 500 at the end of the current month is lower than current prices. This is based on a 0% YoY price appreciation and with a reference price of 2705 at the end of May 2018.

On the valuations side, most metrics (P/E forward, P/CFO, P/B) on equity indices are now moving back to the September 2018 levels, entering the expensive zone, hence limiting the future potential. Sentiment indicators, which tend to be good contrarian signals, are pointing toward euphoria, meaning a setback is a credible option. Last but not least, global risks have not really been priced in for 2019 and can resurface in the coming months, sparking some volatility’s spike. And when everyone is betting for a calm market, i.e speculative positioning in short VIX is extreme, we will not be surprised to see the opposite to happen.

Sell in May and go away might sound attractive in this case. Raising cash, booking some profits and trying to partially preserve the accrued YTD performance seem appropriate after such a powerful rally in risky assets.

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