Sell in May and be dismayed
Based on the premise that stock markets often perform poorly during the summer, equity investors are often advised to sell in May and go away. However, those who actually followed this advice earlier last month may be somewhat dismayed by their performance since then.
As it turned out, most major stock markets have risen in the five weeks since the beginning of May.
Stock markets are hardly out of the woods, though. Recent economic indicators show that the global economy has not moved decisively out of the soft patch in the first quarter.
Some indicators have continued to surge strongly, for example, US housing sales and prices. Other indicators have turned around in April after weak figures in March, for example, US durable goods orders and Japanese industrial production.
However, many forward-looking indicators remain weak. For example, the Conference Board's US leading index fell in April, as did the German Ifo index.
And in the manufacturing sector, the JPMorgan global manufacturing purchasing managers' index fell to 51.1 in May from 51.9 in April, indicating a rate of growth that is the lowest since July 2003. All the major sub-indices fell in May.
Most of the major national PMIs also deteriorated.
The services PMIs held up slightly better, with the JPMorgan services index edging up to 57.8 in May from 57.4 in April, although in the US, the Institute for Supply Management's non-manufacturing index fell to 58.5 in May from 61.7 in April.
To top off the recent spate of poor economic indicators, the Labor Department announced last Friday that the US economy added only 78,000 non-farm jobs in May, the lowest gain since August 2003.
No doubt, there remains a great deal of uncertainty as to whether the global economy will be able to sustain its growth. Which is possibly why bonds have done well recently too.
US 10-year Treasury yields fell from about 4.2 percent at the beginning of May to below 4.0 percent last week. Yields have fallen in spite of the Federal Reserve raising the target for the federal funds rate to 3 percent in May, a testimony to the amount of liquidity sloshing around in the global economy.
Economists and investors are getting comfortable with low yields. In his investment outlook in May, Bill Gross of Pacific Investment Management Co wrote that he saw a range of 3-4½ percent for 10-year Treasury yields over the next three to five years. Morgan Stanley's Stephen Roach, a bear on bonds for some time now, wrote in the Global Economic Forum on 31 May that he has done some rethinking and he would not be shocked to see the 10-year Treasury yield test 3.5 percent.
And yet, are these the sign of capitulation by bond bears? If the consensus now is for yields to stay low, is it time to take a contrarian bet that yields will finally start to rise?
The spread between US 10-year and 3-month Treasury yields have dropped from about 200 basis points at the beginning of the year to about 100 basis points now. With the yield curve now practically flat, it is more likely that long-term rates would respond to further rate hikes by the Federal Reserve in the conventional manner. Which means that if the Federal Reserve is really determined to cool the economy and asset markets further and continue to raise the target federal funds rate, bond bulls might yet be in for an unpleasant surprise.
And the consequence is likely to be greeted with dismay by equity investors too, and possibly leaving them wishing that they had taken the advice to sell in May after all.
As it turned out, most major stock markets have risen in the five weeks since the beginning of May.
| At end April | Close on 3 June | Percentage gain | |
| S&P 500 | 1,156.85 | 1,196.02 | 3.4 |
| Nikkei 225 | 11,008.90 | 11,300.05 | 2.6 |
| FTSE 100 | 4,801.7 | 4,999.4 | 4.1 |
| DAX | 4,184.84 | 4,510.39 | 7.8 |
| CAC 40 | 3,911.71 | 4,162.47 | 6.4 |
| All Ordinaries | 3,943.1 | 4,149.3 | 5.2 |
| Straits Times | 2,125.25 | 2,192.67 | 3.2 |
Stock markets are hardly out of the woods, though. Recent economic indicators show that the global economy has not moved decisively out of the soft patch in the first quarter.
Some indicators have continued to surge strongly, for example, US housing sales and prices. Other indicators have turned around in April after weak figures in March, for example, US durable goods orders and Japanese industrial production.
However, many forward-looking indicators remain weak. For example, the Conference Board's US leading index fell in April, as did the German Ifo index.
And in the manufacturing sector, the JPMorgan global manufacturing purchasing managers' index fell to 51.1 in May from 51.9 in April, indicating a rate of growth that is the lowest since July 2003. All the major sub-indices fell in May.
| April | May | Change | |
| Global PMI | 51.9 | 51.1 | - |
| Output | 53.6 | 52.9 | - |
| New Orders | 52.6 | 51.6 | - |
| Input Prices | 64.2 | 56.4 | - |
| Employment | 50.6 | 49.6 | - |
Most of the major national PMIs also deteriorated.
| April | May | Change | |
| US | 53.3 | 51.4 | - |
| Eurozone | 49.2 | 48.7 | - |
| Japan | 53.3 | 53.5 | + |
| UK | 49.1 | 47.3 | - |
| China | 54.4 | 53.3 | - |
| Australia | 52.9 | 50.5 | - |
| Singapore | 49.7 | 51.0 | + |
The services PMIs held up slightly better, with the JPMorgan services index edging up to 57.8 in May from 57.4 in April, although in the US, the Institute for Supply Management's non-manufacturing index fell to 58.5 in May from 61.7 in April.
To top off the recent spate of poor economic indicators, the Labor Department announced last Friday that the US economy added only 78,000 non-farm jobs in May, the lowest gain since August 2003.
No doubt, there remains a great deal of uncertainty as to whether the global economy will be able to sustain its growth. Which is possibly why bonds have done well recently too.
US 10-year Treasury yields fell from about 4.2 percent at the beginning of May to below 4.0 percent last week. Yields have fallen in spite of the Federal Reserve raising the target for the federal funds rate to 3 percent in May, a testimony to the amount of liquidity sloshing around in the global economy.
Economists and investors are getting comfortable with low yields. In his investment outlook in May, Bill Gross of Pacific Investment Management Co wrote that he saw a range of 3-4½ percent for 10-year Treasury yields over the next three to five years. Morgan Stanley's Stephen Roach, a bear on bonds for some time now, wrote in the Global Economic Forum on 31 May that he has done some rethinking and he would not be shocked to see the 10-year Treasury yield test 3.5 percent.
And yet, are these the sign of capitulation by bond bears? If the consensus now is for yields to stay low, is it time to take a contrarian bet that yields will finally start to rise?
The spread between US 10-year and 3-month Treasury yields have dropped from about 200 basis points at the beginning of the year to about 100 basis points now. With the yield curve now practically flat, it is more likely that long-term rates would respond to further rate hikes by the Federal Reserve in the conventional manner. Which means that if the Federal Reserve is really determined to cool the economy and asset markets further and continue to raise the target federal funds rate, bond bulls might yet be in for an unpleasant surprise.
And the consequence is likely to be greeted with dismay by equity investors too, and possibly leaving them wishing that they had taken the advice to sell in May after all.
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