Sell in May? Investors warned not to let their guard down

CIO says second half of the year will present challenges and it will pay to stay ahead of factor changes

Sell in May? Investors warned not to let their guard down

The old adage of “sell in May and go away” presents a dilemma to investors in 2021, according to one CIO. While last year was certainly not a time sell as markets rebounded from being crushed in March, this year the S&P 500 is higher by 11.3% for the first four months.

Greg Taylor, of Purpose Investments, expects pent-up demand to push prices higher for the next few quarters but said that by the second half of the year, things could have gone too far.

He said: “The market observers are rightly focused on determining when the FOMC will take away the punch bowl, signalling that the party is over. But markets are forward looking and once that time arrives it will be too late. Positioning for that new environment will have to be done earlier. This doesn’t mean markets will crash, but a dramatic change in leadership could occur.”

Taylor explained that when the economy is struggling, investors pay a higher multiple for those few companies that are winning. However, as we start to imagine a world of 3% unemployment, 3% GDP growth, and a 3% 10-year yield, investors no longer need to pay huge multiples for growth because it’s more common. “Does this mean they may begin to favour cyclical companies with a strong balance sheet and cash flow?,” he said. “Value stocks may finally come back in favour after many years of being ignored.”

The second half of the year will bring new challenges as stimulus programs get scaled back and the focus turns to tax hikes. Taylor concluded that selling in May might be too soon, but warned investors that the time is coming and they need to get ahead of these factor changes before everyone sees it has arrived. This means strategies that add value through positioning within assets classes, sectors, and duration should outperform. In short, active management is back.

Taylor said: “The world is still recovering from the shock of the pandemic and finally there is light at the end of the tunnel — but just because the all-clear has been sounded doesn’t mean investors can let their guard down.”

Commodity moves – take lumber, for example – have fuelled concerns that rising inflation is imminent. Bankers, though, have pushed back against inflation fears, saying it's “transitory” and that the surge in prices is down to the growing pains from restarting global supply chains that have been shut down for most of last year.

Taylor pointed out that the bond market is making its bet is this debate, with bond yields signalling that this price move may be more long lasting. Less than a year ago, the U.S. 10-year bond was yielded under 0.5%. It ended April over 1.6%, and many are expecting it to finish 2021 over 2%.

He said: “If inflation expectations keep increasing, yields will follow. This will have an impact on what sectors will win and what markets will outperform. You can’t ignore the bond market.

“The biggest story in markets remains the record levels of stimulus and cash in the system. It is flowing to all asset classes, but as investors begin to lose money in bonds, increasingly this cash is coming to equities and real assets. This makes it hard to short this market, other than for tactical reasons — that is until the central banks decide they have had enough. Remember, 'Bull markets don’t die of old age—they are murdered by the Fed'.”