/perspectives/weekly-viewpoint/sell-in-may-and-go-away-”-–-not-this-year

“Sell in May and Go Away?” – Not this year

The Dow Jones Industrial Average (Dow) rose 0.67%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.12%, the Standard & Poor’s 500® Index (S&P 500) gained...

June 02, 2014    |    By Mike Schwager

Performance for Week Ending 5/30/14:

The Dow Jones Industrial Average (Dow) rose 0.67%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.12%, the Standard & Poor’s 500® Index (S&P 500) gained 1.21% and the NASDAQ Composite Index (NASDAQ) tacked on 1.36%. Sector breadth was positive as all 10 of the S&P sector groups finishing higher. The Utility sector (+2.21%) paced the gains followed by Consumer Staples (+1.72%) and Technology (+1.39%).

Index* Closing Price 5/30/2014 Percentage Change for Week Ending 5/30/2014 Year-to-Date Percentage Change Through 5/30/2014

Dow

16717.17

+0.67%

+0.85%

Wilshire 5000

19951.28

+1.12%

+3.62%

S&P 500

1923.57

+1.21%

+4.07%

NASDAQ

4242.62

+1.36%

+1.58%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 5/26/14 - 5/30/14

The major market indices finished the holiday shortened week solidly higher on growing confidence the U.S. economy is regaining momentum during the current quarter. Adding to the positive tone were fading geopolitical tensions in Ukraine and expectations of more monetary easing by the European Central Bank (ECB) at the conclusion of this week’s meeting. The upward momentum left the S&P 500 at a new all time high.  For the month, all of the major averages finished in the green, breaking the old Wall Street adage “Sell in May and Go Away.”

On the economic front, the much anticipated revision to the first quarter GDP was released last week. The Commerce Department reported that U.S. economic growth contracted by 1.0% during the first quarter, well below their initial estimate of 0.1% growth. While a downward revision was widely expected, the magnitude of the revision caught some investors off guard (consensus was -0.5%). With that said, almost all the downward-revision was due to the lower than initially estimated pace of inventory accumulation. This in turn should bode well for the current quarter as the lighter than anticipated build in inventories should result in a more rapid pace of production this quarter. Elsewhere, the Labor Department reported that initial jobless claims in the most recent week dipped 27K to 300K. Results were solidly better than the 318K gain expected by economists. More importantly, the 4-week moving average—which helps smooth the week to week volatility—came in at 311.5K, the lowest level since August 2007 and another data point suggesting the labor market continues to heal.

While the path of least resistance for the market over the course of the year is still expected to be higher, as we approach the summer months, a cooling off period wouldn’t be surprising. With that in mind, the intermediate- to longer-term outlook for the market continues to be well supported by solid macro fundamentals. U.S. economic growth is likely to remain in a “goldilocks” phase (not too hot, not too cold) with consensus forecasts for full-year growth settling in a range of 2.5%–3%. This level should be strong enough to continue to drive labor market and earnings growth, but not too strong that the Federal Reserve (Fed) would consider prematurely hiking interest rates. The muted inflationary environment should also be supportive due to the inverse relationship between inflation and multiples. By historical standards, when inflation has been below 2%, the price to earnings (P/E) multiple on the S&P 500 has averaged closer to 20 times trailing earnings versus the current 17.6 multiple.

The outlook for Europe also remains attractive. Economic conditions continue to strengthen, as suggested by the 10-month expansion in the Eurozone manufacturing PMI Index. Consensus expectations for GDP growth have been trending higher with growth estimated at 1.1% in 2014 and 1.5% in 2015. In addition, financial conditions continue to improve with bond yields in many regions of the Eurozone back to pre-crisis levels. Valuation also looks reasonable with the MSCI Europe Index selling for just over 15 times 2014 earnings estimates and 13.5 times 2015 estimates.

The Week Ahead

The focal points of the upcoming week will be the European Central Bank meeting on Thursday and Friday’s monthly payroll report. On the latter, the consensus estimate from Bloomberg has nonfarm payrolls advancing by 218K and the unemployment rate ticking modestly higher to 6.4% (from 6.3%).  Private payrolls—which filter out government hiring/firing—are expected to rise 210K.  Other economic reports of interest include the May ISM manufacturing survey, the May PMI manufacturing index, April construction spending, April factory orders, the May ADP Employment Reports, the May ISM non-manufacturing index and the periodic Federal Reserve Beige Book. The earnings calendar continues to move to the backburner as only 5 members of the S&P 500 are scheduled to report during the week. Lastly, the European Central Bank is scheduled to meet on Thursday morning, with the consensus universally expecting the European Central Bank to announce additional easing initiatives. Stimulus is likely to come in the form of reduced rates, although there is a small probability that a quantitative easing program could be introduced.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm’s headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor’s 500® Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys. 

Purchasing Managers Index – (PMI) An indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

ISM Non-Manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is created based on the data from these surveys, that monitors economic conditions of the nation

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

Past performance is no guarantee of future results. Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.




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