Buy in May and go away?

It looks like the old saying “Sell in May and go away” has just been turned on its head. After cratering for seven weeks, the S&P 500 index ended last week up 6.6%

This was the best performance since November 2020 for the index, which is the best-known gauge for the mood on Wall Street.

The seven weeks prior were the longest losing streak of the index since 2001 – not even during the great financial crisis of 2007-2009 or during the Covid-19 crisis had US stocks spent such a long time in the red.

So is the worst behind us, and stocks (or at least, US ones) have resumed their upwards trajectory for good? Should investors buy in May and go away, focus on the holiday? (I couldn’t resist the rhyme — sorry).

Some in the markets argue that there are signs that inflation has peaked and therefore central banks will not increase interest rates as much as feared. They also point to the fact that wages haven’t yet caught up with inflation – and hope that they never will.

This would mean that a wage-price spiral (when wages rise to keep up with inflation, but this boosts demand, which in turn pushes prices even higher, and the cycle repeats) will not necessarily materialise.

That would be a good thing, as a wage-price spiral would push the world’s biggest economy (and with it, the global economy) into stagflation – years of rising inflation but weak economic growth or even recession.

The timing for the rally seems perfect too: one of the indicators that in the past has predicted accurately short-term market moves was in fact signalling a strong contrarian “buy”.

Green light for a summer rally?

The Bank of America Bull & Bear indicator fell last week to 0.6, deep in contrarian “buy” territory. The indicator signals a contrarian “buy” when it falls below 2, and a contrarian “sell” when it rises above 8.

Source: BofA Global Investment Strategy

It seems, then, that it’s all go for a summer rally? Not so fast. The indicator’s signal is usually short-term (one to three months) and there is no clarity about the path of the economy, because of Russia’s war on Ukraine.

Inflation is probably quite far from its peak, as the war has pushed up not only oil and gas prices but also the prices of staple commodities such as grains. The longer it goes on, the higher the food prices will be.

This, as international organisations have warned, will push millions of people in developing countries into deeper poverty, sparking food crises in various places.

In turn, a humanitarian and possibly migration crisis could follow. This would put even more pressure on strained resources and public and private budgets in the West, which could dampen domestic demand even more.

This would not paint a rosy picture for stocks, but on the other hand, markets recently seem to prefer to take bad news as good news: Some investors think a weak economy will prevent central banks from raising interest rates too fast.

Therefore, by all means, buy in May if you feel like it – but don’t go away just yet.