So, What

So, what.  Stocks sold off on Friday as investors ignored positive economic numbers and continued record earnings beats. Investors are beginning to expect nothing but greatness out of their investments, issuing harsh punishments for transgressions.  

N O T E W O R T H Y

Impress me, if you can.  Things appear to be quite positive for the economic recovery and for corporate earnings, according to the latest round of releases and earnings.  If you followed the market closely last week though, you wouldn’t know that things were going so well.  Friday’s selloff in stocks punctuated the month with a sour note, despite a week full of what would be considered positive developments, historically at least.  So what gives?  Because it’s Monday, I am going to share not 1, but 2 of Wall Street’s famous adages.  Adage No. 1: Sell in May and go away.  I am quite sure that many of you have heard this one.  You haven’t?  You may not have heard it, but you have certainly felt it.  The saying instructs investors to quite literally sell in May.  Though it is not in the actual prescription, it assumes that you will return to your senses and buy again later in the year, like October or November.  Trust me on this.  There is some historical logic behind it. Way back in the dark ages of investments, say a couple of decades ago, investors relied on wired telephones to call their stock brokers for information and to make trades. It is clear that, historically, large investment firms dictated the tempo and temperament of the markets. After May comes June, which is the unofficial start to the summer months on Wall Street.  Summer travel, leisure, the beach, etc. became the name of the game. The unopened Wall Street Journal in your brokers briefcase took second seat to a good classic summer read like the Old Man and the Sea.  As such, trade volume and motivation has been thought to be the reason for the actual muted historical returns in the so-called, summer months. Yes, I did in fact, just use the adjective actual.  If we look back at the historical average returns of the S&P500 through different monthly intervals, we would see that the 6 month period of May Through October offered the lowest return.  Don’t get nervous. The word “average” implies that some are lower and some are higher, and even more importantly, Wall Street has changed significantly in the past few decades.  Investors are far more active than they were historically, in fact, investors, themselves, have a far greater impact on the markets’ tempo than in the past.  Information is readily available and accessible nearly 24/7 and online trading occurs almost around the clock. Bitcoin never stops trading!  The beach is no longer an excuse to put off an investment decision.  On average since 1950, the S&P500 has returned just +1.7% during the 6 month period of May through October, but you wouldn’t have known that in the past 2 years, which returned +10.37% and +7.41%.  The first year was marked by a global trade war and the second by a pandemic.  In any case, you now have the facts on Adage No. 1.  Adage No. 2: Buy the rumor and sell the news.  Go ahead, read it again.  Does this prescription instruct investors to sell stocks on good news?  It might, but I am going to stop you right there before you do anything silly.  Don’t do that!  Wall Street is really good at describing what things happened and less adept at describing what might happen. This saying might easily be interpreted as an investment strategy, when it is, in fact more likely a description of what has happened.  Applying it to the markets over the past several months may help put it in perspective.  Investor sentiment has been quite high since late 2020 when the first vaccinations were announced.  Lockdowns would soon end, unemployment would recede, big stimulus was on the way… an economic boom was afoot.  This was accepted as fact, and stocks reflected the sentiment.  A rocky September and October 2020 gave way to a +27.98% S&P500 rally culminating on last Friday’s close. Clearly, expectations are high, a point which I have written about quite often over the past several weeks.  Earnings season continues to overwhelm with positive beats on both earnings and revenues.  The prior weeks’ economic numbers too, have been on the high side of economists’ estimates.  Despite this, we have still witnessed strong earnings and economic announcements being met with counterintuitive selling.  The reason for the selling is most likely an increasing higher level of expectation.  Think about saving all of your money so that you can take your significant other to a very expensive restaurant.  As you get closer to achieving your goal, you can almost taste the meal. Unfortunately, ever increasing expectations for the meal may be setting you up for well… disappointment, even if the food is perfectly cooked.  Why am I referencing a dinner at a tony restaurant when talking about stocks.  Because not unlike diners, investors are subject to human emotions as well.  Just because that meal at the posh restaurant didn’t meet your high expectations despite being expertly prepared in a consistent manner, doesn’t mean that the restaurant will not make it.  When it comes to stocks, consistently strong fundamentals combined with an economy that is growing gives investors the highest probability for success.  Sure, expectations are high at the moment, causing a bit of emotional reaction.  If you are in it for the long game, which I often espouse, you will look back at these emotional moments as little bumps along the road to success. Stay focused and stick to your long term investment strategy, it will pay off.  The numbers are on your side… and there are probably at least a dozen Wall Street allegories about that too.

THE MARKETS

Stocks sold off on Friday, despite positive economic numbers and earnings releases.  Good news might be perceived as being bad, despite the Fed’s insistence that it would remain accommodative. The S&P500 sold off by -0.72%, the Dow Jones Industrial Average fell by -0.54%, the Russell 2000 Index dropped by -1.26%, and the Nasdaq Composite Index gave up -0.85%.  Bonds gained and 10-year treasury yields fell -1 basis point to 1.62%.

NXT UP

– Markit Manufacturing PMI (April) is expected to be 60.7, slightly higher than the 60.6 flash estimate.

– ISM Manufacturing Index (April) may have risen to 65.0 from 64.7.

– Construction spending (April) is expected to have grown by +1.7% after falling by -0.8% in the prior month.

– This morning Enterprise Products Partners and Estee Lauder beat estimates.  After the bell, we will hear from Vornado Realty Trust, Mosaic, Diamondback Energy, Realty Income Corp, Chegg, Transocean, Avis Budget, ZoomInfo, Williams, and American Water Works.

– The earnings bonanza will continue throughout the week in addition to economic numbers which include Factory Orders, Durable Goods Orders, services PMIs, and the monthly employment numbers from the Bureau of Labor Statistics.  Please refer to the attached calendars of economic and earnings releases for details.