Despite our best wishes, the Bureau of Economic Analysis will not allow the first quarter negative GDP print to fade into obscurity. Over the last three months we’ve received revisions, each worse than the prior, reminding us that the best-laid plans…oft go astray. On top of a contracting economy, geopolitical risks in the Middle East, and its effects on oil prices, had many investors predicting some sort of equity correction as the summer approached. Those cries rang loudest during the spring’s typical “sell in May and go away” recommendation. Those who took that advice were surely disappointed as May and June have proven to be two of the best performing months of the year, with broad participation across global equity markets. Let’s take a look at June’s performance here.
A famous study done on the “Sell in May” saying, published in the American Economic Review in 2002, found that this phenomenon does exist, that returns on stock markets in 36 out of 37 countries studied from 1970 to 1998 were indeed higher in the November to April period than they were in the May to October period. But, as is usually the case, the devil is in the details. In the long run, a buy-and-hold strategy outperforms the “sell in May, buy back in October” strategy because although equities underperformed during the summer months, the returns were still positive over the long-term.
We continue to see significant signs of improvement in housing and labor markets, and the threat of global deflation has receded into the background. The domestic housing market, which has been a headwind to growth, continues to show signs of life as homes are still affordable, despite rising prices, and are being financed at historically attractive rates. U.S. non-farm payrolls continue to consistently add new jobs to the economy at greater than 200K per month, a pace indicative of a labor market with less slack in it than is currently being acknowledged by the Fed. We maintain that prices are likely on the rise and that this upward pressure on inflation, as employment improves, should be more positive for the U.S. economy than negative. When the unemployment rate falls below 6%, which is likely to occur before the end of the year, Fed officials will have to consider moving forward its forecast for initial policy rate liftoff, currently estimated to be mid 2015.
Market commentary provided by Fifth Third Bank. Source of
statistics is Bloomberg.com. This information is current as of the date of this
letter and the opinions expressed are subject to change at any time, based on
market and other conditions. This information is intended for educational
purposes only and does not constitute the rendering of investment advice or
specific recommendations on investment activities and trading. The mention of a
specific security within this letter is not intended as a solicitation to buy
or sell the specific security. Index performance shown within this letter is
not representative of any Fifth Third managed account.
Fifth Third Securities is the trade name used by Fifth Third Securities, Inc., member FINRA/SIPC, a wholly owned subsidiary of Fifth Third Bank, a registered broker-dealer, and a registered investment advisor registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Securities and Investments offered through Fifth Third Securities, Inc. and insurance products:
Insurance products made available through Fifth Third Insurance Agency, Inc.
2014 Fifth Third Bank
Deposit and credit products provided by Fifth Third Bank. Member FDIC.