STOCK MARKET FORECAST: SELL IN MAY AND GO AWAY ANOMALY AT CONFLUENCE WITH CORONAVIRUS RECESSION, US-CHINA TRADE WAR TENSION & FED BALANCE SHEET GROWTH
- ‘Sell in May and go away’ anomaly highlights abnormally poor stock market performance during May and summer months
- Dow Jones price action has gained about 3% so far this month as coronavirus vaccine hope and global stimulus efforts facilitate an extended rebound in stocks
- The stock market remains threatened by lingering coronavirus recession risk and escalating US-China tension
The Dow Jones has climbed roughly 3% so far this month in an extension of the astonishing 34% surge from its March 23 low to April 30 close. Stocks have gyrated broadly over the last few weeks, however, as investors battle over the market’s next direction amid conflicting fundamental drivers. For example, Dow Jones price action has recently faced selling pressure due to escalating US-China trade tension and lingering coronavirus recession risk, but vaccine hope and an abundance of liquidity provided offsetting tailwinds that helped fuel stocks higher.
| Change in | Longs | Shorts | OI |
| Daily | 5% | -5% | -1% |
| Weekly | -6% | 1% | -2% |
That said, the Dow Jones and other US equity benchmarks, like the S&P 500 and Nasdaq, might surrender May gains as month-end quickly approaches this Friday. In addition to the likelihood that stocks maintain their broad trading range amid offsetting undercurrents, the sell in May and go away anomaly remains in focus, which is a narrative highlighting abnormally poor stock market performance throughout May and summer months.
DJI PRICE CHART – DOW JONES INDUSTRIAL AVERAGE SEASONAL RETURNS: SELL IN MAY AND GO AWAY
Sell in May and go away might look like a statistical phenomenon on the surface, and contradiction of the efficient market hypothesis, but taking a deeper dive into macroeconomic history, and drawing upon context of major financial crises, reveals fundamental catalysts often explain why the Dow Jones and broader stock market have experienced lackluster returns during May and summer months.
For example, just looking at the past decade, Greece was on the verge of defaulting on its debt in May 2010. Summer of 2011 saw the ECB stave off the Eurozone credit blowup by implementing its bond-buying program to save Italy and Spain.
China slashed its GDP growth estimates mid-2015 as it announced plans to restructure its economy for more sustainable growth. Similarly, the January effect, another seasonal stock market anomaly, can be explained by fundamental drivers as well.
DOW JONES PRICE OUTLOOK THREATENED BY CORONAVIRUS RECESSION, US-CHINA TRADE WAR
On that note, and in consideration of current market conditions, such as the likely unavoidable coronavirus recession, or reintroduced trade war uncertainty, the risk of another sharp stock market selloff looms large. Perhaps a sustained double-digit unemployment rate could send a harsh reminder of economic reality, fuel the return of risk aversion, and motivate investors to unwind the recent stock market rally driven largely by central bank liquidity.
At the same time, as Trump talks tariffs, global equities face fresh headwinds from rekindled US-China trade war tension. Also, while investor complacency builds, the stock market seems increasingly detached from fundamentals currently pricing stocks at record-high valuations on a 12-month forward P/E basis. Dow Jones price outlook correspondingly remains bearish. In turn, it seems quite possible that the sell in May and go away stock market anomaly could come to fruition once again this year.
Keep Reading: US Dollar Boosted, S&P 500 Threatened by Renewed China Tension
-- Written by Rich Dvorak, Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
