An old and frequently-used adage on Wall Street, “Sell in May and go away,” often gets a re-examination at this time of year – for obvious reasons. That cliché always finds sponsorship, but for varying reasons. This year there are stock-specific ones. Market leaders Palo Alto Networks (PANW), CyberArk Software (CYBR), Service Now (NOW), and Intuitive Surgical (ISRG) have all fallen victim to institutional pressure in recent trading sessions. More broadly speaking, the major equity indices have seen weekly gains moderate after a sharp YTD rally. Additionally, as evidenced by the S&P 500 and Dow Industrial charts below, markets are nearing record highs, and not with a great deal of momentum. In fact, over the past two weeks, all three majors have barely mustered enough positive price action to post a 1% total gain, despite relatively strong results from the financial sector and being within 2% of record territory.
Given the waning volume and advance/decline metrics evidenced by equity markets in recent weeks, it would be justifiable to be concerned. As you know, I have been cautious, and remain so. However, even in the event we see some price weakness on the horizon, my sense is that simply selling and going away is not a strategy. Rather, sell outperformance and look for relative strength in dividend-paying stocks – particularly stocks that have a long track record for not only paying dividends, but also raising them.
Q1 earnings have largely been a pleasant surprise thus far, but have not ignited investor enthusiasm enough to move the needle in a meaningful way.
This week’s economic data highlights:
Manufacturing results for March are due out from the Federal Reserve Banks of Chicago, Richmond, and Kansas City this week. Manufacturing has been a lynchpin of the resurgent rally over the past two years. There has been a concern in recent months that manufacturing may be losing a degree of momentum. That concern was highlighted by the March Employment Report. For the month, manufacturing posted a rare contraction of 6,000 jobs. That contraction was part due to GM factory closings. However, if we see weakness in this week’s manufacturing data from the regional Fed banks, look for that concern to become more elevated. We won’t really have a clear indication of whether the March slowdown in manufacturing is more than just a blip on the radar screen until we receive more data from IHS Markit, the Institute for Supply Management and additional monthly employment reports in coming weeks and months.
Last week’s EIA Petroleum Status Report was uneventful. Crude oil inventories ticked lower by -1.4M bbl, as did gasoline inventories by -1.2M bbl, and distillates by -0.4M bbl.
On Friday morning we receive our first read of Q1 GDP from the Commerce Department. Econoday consensus is 2.0% annualized, versus Q4’s reading of 2.2%. Given the modest slowdown that was evidenced in the economic readings of January and February, many economists have been cautious on Q1’s GDP reading. That caution is even more evident in the consensus for real consumer spending Q/Q – SAAR for Q1. Econoday consensus is 1.1% versus Q4’s 2.5%. In part, the expectations for consumer spending were dramatically lowered due to unexpectedly weak employment gains in the early going of the quarter.
GDP results are always impacted by international trade, and more specifically, the degree to which our on-going trade deficit either widens or contracts. Last Wednesday we received the international trade figures for February, which were $-49.4B, versus Econoday consensus of $-53.6B, and January’s better-than-expected $-51.1B. February’s results reflected an eight-month trade deficit low. For the month of February, the drop in the trade deficit was attributable to a 1.1% rise in exports, coupled with a more modest rise of 0.2% in imports. The net results of improving exports could well provide a positive contribution to Q1 GDP. The better than expected trade results for January and February may well end up lifting the GDP figures we receive for Q1 on Friday.
In fact, after the release of the international trade figures last Wednesday, several economists raised their Q1 GDP estimates. Goldman Sachs raised their estimates to 2.1% from 1.7%. JPMorgan Chase raised the GDP estimate to 2.5%, and the Federal Reserve Bank of Atlanta’s GDPNow model was raised to 2.4% – according to Bloomberg News. In short, the GDP reading for Q1 may come in a bit stronger than many are expecting.