Big opener: May begins with Fed rate decision, April’s job report, and a big tech update from Apple
‘Sell in May’ hasn’t been a good strategy in recent years
Retail, semiconductor earnings loom large in May as critical sectors come under a microscope
Alex Coffey, Senior Trading Strategist, TD Ameritrade
One phrase you’re likely to hear this time of year is, “Sell in May and go away.” If you paid no heed the last few years, you’re probably better off.
Why? Because today’s market doesn’t care about old myths. The S&P 500® index (SPX) rose 4.5% in May 2020, 0.5% in May 2021, and was flat in May 2022. The last two Mays weren’t exactly memorable, but stocks didn’t fall off the table either.
Perhaps you want to look beyond May itself, figuring the adage means go away for a long summer break before jumping back into the market. But in two of the last three years, the SPX was higher at the end of August than it had been on April 30.
None of this means May is necessarily going to see stocks rise or that we can count on a summer rally. It just highlights what many analysts say is the importance of staying invested for the long term. Ultimately, being out of the market means you could miss an important rally, and no investor can consistently time the market using so-called “seasonal” trends as a guide. That’s why “sell in May” deserves far less attention.
With that myth hopefully dispelled, what might May 2023 hold for investors? It’s quite front-loaded, featuring a Federal Open Market Committee (FOMC) meeting, Apple (AAPL) earnings, and the April Nonfarm Payrolls report the very first week. As the month advances, we might see volatility kick up from current low levels if Congress doesn’t make progress toward raising the debt ceiling. Goldman Sachs (GS) recently said the United States might have only until June to address this issue.
Fed ahead with another hike expected
Long before that, the Federal Reserve gets another crack at its long-running attempt to push down stubborn inflation when it meets May 2–3. As of late April, the futures market projected a nearly 90% chance of the FOMC raising rates another 25 basis points to a range of between 5% and 5.25%, according to the CME FedWatch Tool.
This probability was only 20% in late March, but hawkish remarks by many Fed officials since then, along with stubborn growth in core inflation measures, appeared to change the market’s collective mind. Now the feeling is the Fed is almost certain to raise rates in May, and it might have another hike in its pocket for June, before perhaps pausing there.
If you’re wondering why Fed speakers continue to pound the inflation table despite cooler price gains reported recently, it helps to look more closely at the data. “There has been a lot of cheering over the disinflation in headline inflation metrics, but core measures—which strip out volatile food and energy prices—are not easing nearly as fast,” noted Kevin Gordon, Schwab’s senior investment strategist.
For instance, the core Consumer Price Index (CPI) rose 0.4% in March month over month and 5.6% year over year. Annual growth in core CPI actually rose sequentially from 5.5% in February, a sign that core consumer inflation may be getting “sticky.” Housing and rent prices constitute a big part of this stickiness.
A labor market that’s still tight also could force the Fed’s hand. Unemployment fell to a near-historic low of 3.5% in March. While job openings have started to fall and initial jobless claims are on the rise, most Fed officials speaking over the last month hinted they still feel the robust labor market could fuel wage gains that lead to more inflation.
“Inflation is still too high, and we will use our monetary policy tools to restore price stability,” said New York Fed President John Williams in an April 20 speech. He added that conditions in the banking industry appear to have cooled following the March crisis that saw two bank failures. If the Fed believes that situation is easing, it could smooth the path to a rate hike.
On the other hand, the market expects the Fed to begin cutting rates later this year, a sentiment that gained traction in mid-April after the FOMC’s meeting minutes said FOMC officials expect a “mild recession” later in 2023. Futures trading continues to be in a tug-of-war with FOMC projections, which see no rate cuts until 2024 at the earliest.
The FOMC meeting gives investors another chance to glean Fed Chairman Jerome Powell’s thinking. One word to listen for during his post-meeting press conference is “disinflation,” which he mentioned earlier this year, sparking market enthusiasm. Since then, there’ve been signs that disinflation in the goods industry of the economy may have stalled, while services inflation remains stubborn.
FLATLINING: Stocks in the S&P 500 index (SPX—candlesticks) and the 10-year Treasury note yield (TNX—purple line) flattened in the latter part of April as earnings season began and the futures market priced in higher probabilities of another Fed rate hike. Data sources: Cboe, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
May earnings highlighted by Apple, retailers
Goods are mostly what AAPL sells, and there’s trepidation heading into the company’s May 4 earnings that demand for some of its products may be slipping. Mac sales could be the troubling issue this time out if recent reports are right. Research firm IDC said earlier this month that AAPL’s worldwide computer shipments fell more than 40% in Q1.
Competitors also saw lower shipments, the firm said, but AAPL declined the most, implying loss of market share. Mac sales already took it on the chin in late 2022, falling nearly 29% in the holiday quarter, which was AAPL’s fiscal Q1.
AAPL shares recently traded at their highest levels of the year before dipping April 20 under pressure from Taiwan Semiconductor’s (TSM) softer-than-expected guidance. While TSM doesn’t publicly state which companies buy its chips, analysts following the industry believe AAPL is an important customer, so any softness at TSM could be interpreted as a possible sign of weaker demand from AAPL.
AAPL is far from the only critical company reporting in early May as earnings season picks up steam. Investors also can expect Pfizer (PFE), CVS Health (CVS), Advanced Micro Devices (AMD), Kraft Heinz (KHC), Yum Brands (YUM), ConocoPhillips (COP), and Kellogg (K) to open their books in the very first week of the month.
We’d be remiss not to look further ahead to late May when major retailers like Walmart (WMT), Target (TGT), Home Depot (HD), and Lowe’s (LOW) are expected to report. Another key earnings report to look for later in May is semiconductor chipmaker Nvidia (NVDA).
With AMD and NVDA, the semiconductor market comes back under scrutiny following a disappointing outlook in late April from chip giant TSM. There’ve been fits and starts in the industry, suggesting demand might be on the recovery path, but it remains an open question. Some higher-profile chip stocks like NVDA and AMD saw shares flatline or even fall in late April following solid gains earlier this year.
Overall, earnings season is off to a mixed start as major tech companies prepared to report the last week of April. Of the companies reporting through April 21, 76% beat analysts’ average earnings-per-share (EPS) estimate, about equal to the five-year average, according to research firm FactSet. Only 63% reported revenue that surpassed Wall Street’s average estimate, down from the five-year average of 69%.
More important, year-over-year EPS are expected to decline 6.2%, FactSet said, putting corporate America on pace for a so-called “earnings recession” in which profits fall two quarters in a row. Digging deeper, companies beating estimates are doing so by less on average, and profit margins remain weak relative to a year ago.
Investors will likely keep a close watch on those statistics as May advances, getting a better sense of corporate health. Company outlooks also remain important to monitor in May, especially if corporations say they continue to see pressure from inflation. This could keep earnings pressured later this year when most analysts expect a rebound.
April jobs growth seen on downward path
The April jobs report arrives May 5 after March job gains of 236,000. That number was right in the range of analysts’ forecasts and down from 326,000 in February. Average hourly wages rose 0.3% year over year, and the unemployment rate dipped to a historically low 3.5%.
Overall, the report got a polite reception on Wall Street because it suggested the hot labor market might be cooling a bit. This would potentially ease inflation pressure from rising wages in the long haul, though inflation remains a tricky issue for now.
Investors got more market-friendly news on the jobs front recently as job openings fell and initial jobless claims rose in April. No one wants people to lose their jobs, of course, but the initial claims data indicates some of the heavily publicized recent layoffs may finally be showing up in the data. This could mean slower economic growth ahead, taking pressure off the Fed to keep hiking rates.
That, in turn, might mean a drop in Treasury yields, which zoomed higher in April following their plunge in March. The 10-year Treasury yield (TNX) has been pivoting around 3.5% lately, down from well above 4% earlier this year but up from recent lows below 3.3%. If yields do take another downturn in May, it could be a sign of growing recession concerns.
It’s still early, but Wall Street’s consensus estimates for April jobs growth are 181,000, according to Trading Economics. Analysts see wages growing another 0.3% in April, which may not be enough to ease market concerns over inflation. Keep an eye as well on labor market participation. It’s risen recently and returned to pre-pandemic levels, perhaps a good sign that more people are back at work.
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