“Sell in May and Go Away” ... Not so Fast

The Dow Jones Industrial Average (Dow) fell 1.21%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.84%, the Standard & Poor’s 500® Index (S&P 500) finished off 0.88% and the Nasdaq Composite Index (NASDAQ) shed 0.38%.

June 01, 2015    |    By Mike Schwager

Performance for Week Ending 5/29/15:

The Dow Jones Industrial Average (Dow) fell 1.21%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.84%, the Standard & Poor’s 500® Index (S&P 500) finished off 0.88% and the Nasdaq Composite Index (NASDAQ) shed 0.38%. Sector breadth was negative with all 10 S&P sector groups finishing lower. The Energy sector (-2.06%) led the decline followed by Industrials (-1.92%) and Financials (-1.03%).

Index* Closing Price 5/29/15 Percentage Change for Week Ending 5/29/15 Year-to-Date Percentage Change Through 5/29/15





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 5/25/15-5/29/15

The major market indices finished the week lower with the S&P 500 posting its first down week in the past four. Despite the weekly decline, the S&P 500 finished up 1.3% during the month of May. Impacting this week’s performance was the ongoing concerns surrounding Greece’s debt negotiations, worries over the timing of the first rate hike from the Federal Reserve (Fed), and mixed economic data.

With five months now under our belt, the year-to-date performance of the S&P 500 has been generally lackluster. Granted we are near all time highs, but relative to the performance we are seeing in markets like Europe, the US is underperforming – even adjusting for currency related issues.

The division in performance seems to boil down to the macro headwinds experienced during the early part of this year versus developing tailwinds (Quantitative Easing, firming economic data, etc.) in the Eurozone. In particular, the US markets have been struggling with soft economic data, weak earnings trends, and confusion over Fed policy. However, these items are likely to prove transitory and clarity should emerge as we enter into the second half of the year.

On the economic front, the first quarter soft patch seems to be fading as the impact of tough winter weather and the West Coast port strikes work their way out of the system. Over the past couple weeks we’ve seen a solid uptick in Housing Starts, New Home Sales, Core Durable Goods Orders, and the Services PMI. Jobless claims also remain near cycle lows. Since housing tends to be very sensitive to weather, the rebound in the April data suggests the first quarter weakness may prove to be a one-off event.

On the earnings front, coming into first quarter earnings season consensus expectations were for overall S&P 500 earnings to fall by well over 5%. Turns out that when all is said and done, Q1 earnings will likely finish in positive territory. Nevertheless, concern about the strength of Q2 earnings growth remains elevated reflecting the high level of negative forward guidance that occurred during the first quarter reporting season.

According to Bloomberg, second quarter earnings are currently forecast to decline by over 6% and full year earnings are only expected to rise by just over 1%. With that said, a rebound in economic activity, stabilization in the dollar and oil prices could result in these expectations being too conservative. In other word, the risk to earnings seems to be skewed to the upside.

In terms of Fed policy, as a firm we have circled the September FOMC meeting for the initial lift off in rates, although certain market based indicators are currently suggesting a higher probability that the Fed will wait until December.

Regardless of whether its September or December, the recent Fed rhetoric seems to suggest that they are destined to try and get one hike on the books by year-end. At this point, WHEN seems less important than by HOW much. On that front, the pace of rate hikes will likely be very gradual.

Fed Vice Chairman Stan Fischer told us as much last week. Fischer said that “It’s misleading to give so much importance to the first rate hike since the process of normalization will take a FEW years.”

Besides, even if the Fed raises rates multiple times over the next 12-months – policy will remain very loose and still be supportive of risk assets.

It can also be argued that the market has become slightly more accepting of higher rates. The recent back-up in bond yields should be viewed as a good test run for how the markets may react to lift-off. From mid-April to mid-May, the 10-year yield went from approximately1.85% to almost 2.30%. During that window, the S&P managed to post a new all-time closing high. This may suggest that expectations of higher rates may already be somewhat discounted in the market – stay tuned.

The Week Ahead:
The focal point of the upcoming week will be the monthly jobs report on Friday. According to Bloomberg, economists expect nonfarm payrolls to climb by 225K and for the unemployment rate to hang steady at 5.4%. Other highlights of the economic calendar include; April personal income and spending, the May PMI manufacturing index, April construction spending, the May ADP employment report, May ISM non-manufacturing index figures. Also of interest will be the release of the Federal Reserve’s beige book report. Earnings season comes to a trickle with on six members of the S&P scheduled to report results. The Fed speaking calendar will be busy with five Fed officials scheduled to make appearances. Outside of the US, Wednesday’s meeting of the European Central Bank will be closely watched as will Friday’s meeting of OPEC officials.


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.

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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