Strong May Strong Year
Surprisingly, with a return of 4.8% for the month, the S&P 500 posted its strongest May return in 15 years. These gains continue a trend of positive performances during May since the Covid pandemic. Additionally, these gains emphasize that the old Wall Street adage, “sell in May and go away,” is no longer relevant. As we have previously suggested, a more fitting strategy might be “sell in August and come back in October,” although nothing catchy rhymes with August.
Historically, when the S&P 500 has achieved such a strong return in May, the market action for the remaining seven months of the year tends to be positive. The table below shows the forward performance of the S&P 500 in years where it has returned 3.00% or more in May.
Over the 17 years where the S&P has returned 3% or more in the month of May, there only have been 2 years where the S&P went on to post a negative annual return:
1957- The Eisenhower Recession was the result of aggressive Fed tightening over the previous two years and strong asset gains for most of the decade. This is the only year that saw a double-digit loss over the last seven months of the year.
1990- The invasion of Kuwait by Iraq in August of 1990 caused the S&P to drop by more than -14% during the 3rd quarter, which lead to a negative return of 6.60% for the year.
Considering both negative years, the market has still averaged a return of more than 8% in years where May performance has been strong. Additionally, an interesting fact is that only two of the 17 years with strong May returns since 1950 have been election years, like the current year. Notably, both 1980 and 2020 posted two of the three best fourth-quarter performances. While there are many internal and external issues that could potentially cause the current market to pull back, we will rely on the historical performance of the market and expect overall market strength to continue unless those concerns begin to affect market performance.
Back to Bifurcation
One of the negative issues we currently see with the overall market is that it is extremely bifurcated. The stock market is always made up of equites that are outperforming and underperforming, but when the market is stronger than normal (such as what we have seen so far in 2024), extreme bifurcation becomes a concern. Looking at the S&P 500 at the end of May, here is what we are seeing:
S&P 500 YTD Gain: 10.64%
Number of S&P 500 Constituents Outperforming the S&P 500: 167 (33%)
Number of S&P 500 Constituents Underperforming the S&P 500: 336 (67%)
Historically in years where we see the S&P post stronger than average returns, we usually see slightly more stock outperforming the index, around the 55% range. With only 33% of the S&P constituents currently outperforming the index, we would welcome a broadening of strength as there are simply too few equites doing the heavy lifting at this time.
Another way to illustrate the market's division is by comparing the performance of each index constituent to the overall index, known as relative strength. At the end of May, only 140 equities in the S&P 500 had positive relative performance against the index, one of the lowest readings in the past four years. However, this negatively skewed data suggests that conditions may not worsen significantly. As observed in the summer of 2020 and September- October of last year, the market tends to broaden when relative strength reaches current extremes. The question now is whether the top performers of 2024 can continue supporting the market while waiting for broader participation. Sometimes an indicator is so bad that it’s good.
Important June Dates
June 12
CPI & Core CPI (May)
FOMC Rate Decision PPI
June 13
PPI & Core PPI (May)
June 27
GDP Q1 Estimate
June 28
PCE & Core PCE
Personal Spending
June Market Expectations
Almost all important dates in June revolve around the Fed and inflation data, with market performance dictated by Fed statements and CPI/PPI results. We don’t expect a policy change at the June 12 meeting but anticipate confusing guidance. Last month’s $35 billion per month taper to quantitative tightening was market positive but necessary, which we'll explain later. Most inflation data supports a higher-for-longer stance by the Fed, but two factors suggest possible rate cuts in July or September:
Foreign central banks are cutting rates despite similar inflation data.
Yields on foreign short-term debt are quickly declining, indicating an end to the current rate cycle and more cuts ahead.
We expect tough talk from the Fed this month but believe they will eventually lower rates like other central banks. We also think we're in the final phase of this inflation cycle, which began three years ago. While inflation may remain sticky for a few more months, low personal savings and slowing credit expansion indicate a likely slowdown in consumer spending, driving inflation lower.
The election year calendar suggests a strong market until September, when pre-election investor anxiety typically causes a correction. Our S&P 500 Money Flow Indicator has been strong this year and since early 2023, averaging 68% over the last 17 months. Despite some weakness last fall, our Money Flow Oscillator ended May above the 0% line, traditionally a bullish sign.
June, like May, has seen a shift in its monthly performance expectations over the last few years. Except for a poor return in 2022, June has posted positive returns in 6 of the last 7 years. Before this change, the S&P only had positive June returns twice in the previous decade. We remain bullish on the market and anticipate a similarly positive but muted return for June, following strong May returns. Increased volatility is expected in the second and third weeks of June due to the Fed meeting and inflation data. However, given the positive stance of our Money Flow Indicator and July's status as the best performing month over the last 15 years, we would use any weakness as an opportunity to add to market positions
Best,
Brad Tremitiere CIO