STOCK MARKET FORECAST: SELL IN MAY AND GO AWAY ANOMALY AT CONFLUENCE WITH CORONAVIRUS RECESSION, US-CHINA TRADE WAR TENSION & FED BALANCE SHEET GROWTH
- ‘Sell in May and go away’ anomaly highlights abnormally poor stock market performance during May and summer months
- Dow Jones price outlook appears threatened by underrated coronavirus recession risk and rekindled US-China trade war tension
- Fed balance sheet growth and other accommodative measures combined with fiscal stimulus efforts could counter stock market selling pressure
The Dow Jones recorded an astonishing 34% climb from its March 23 low to April 30 close. When investors flipped their calendars to the new month, however, the Dow Jones and other US equity benchmarks, like the S&P 500 and Nasdaq, started to come under pressure. This brings the sell in May and go away anomaly into focus – a narrative explaining abnormally poor stock market performance throughout May and summer months.
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Sell in May and go away might look like a statistical phenomenon on the surface, and contradiction of the efficient market hypothesis, but taking a deeper dive into macroeconomic history, and drawing upon context of major financial crises, reveals fundamental catalysts often explain why the Dow Jones and broader stock market have experienced lackluster returns during May and summer months.
DJI PRICE CHART – DOW JONES INDUSTRIAL AVERAGE SEASONAL RETURNS: SELL IN MAY AND GO AWAY
For example, just looking at the past decade, Greece was on the verge of defaulting on its debt in May 2010. Summer of 2011 saw the ECB stave off the Eurozone credit blowup by implementing its bond-buying program to save Italy and Spain.
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China slashed its GDP growth estimates mid–2015 as it announced plans to restructure its economy for more sustainable growth. Similarly, the January effect, another seasonal stock market anomaly, can be explained by fundamental drivers as well.
DOW JONES PRICE OUTLOOK THREATENED BY CORONAVIRUS RECESSION, US-CHINA TRADE WAR
Chart created by @RichDvorakFX with TradingView
On that note, and in consideration of current market conditions, such as the likely unavoidable coronavirus recession, or reintroduced trade war tension, the risk of another sharp stock market selloff looms large. Further, the gut-wrenching collapse in nonfarm payrolls, and corresponding spike in unemployment, could cause the recent stock market rally, driven largely by FOMC liquidity, to come crashing back down toward the March lows.
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This is considering how the underrated impact of a double-digit unemployment rate could provide a harsh reminder of economic reality, fuel the return of risk aversion, and send the Dow Jones Index spiraling back lower. At the same time, as Trump talks tariffs, global equities face fresh headwinds from rekindled US-China trade war uncertainty.
Also, while investor complacency builds, the stock market seems increasingly detached from fundamentals currently pricing stocks at record-high valuations on a 12-month forward P/E basis. Dow Jones price outlook correspondingly remains bearish. In turn, it seems quite possible that the sell in May and go away stock market anomaly could come to fruition once again this year.
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— Written by Rich Dvorak, Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight