Some Weekend Thoughts on seasonality and more - 5/2/21

Just some thoughts from the weekend 5/2/21...

Couple of notes on seasonality as we enter the "sell in May" period.  I always hesitate to comment too much on seasonality because like any mapping to the past, it's looking backwards while you're moving forwards.  But I think it does inform things.  As someone said (often attributed to Mark Twain) "History doesn't repeat, but it rhymes".  I liken it to if you're going driving it's good to look around and take into account what the road conditions are.  Just because it's raining doesn't mean you're going to crash, but it does mean maybe you should be a little more cautious than under perfect conditions.  In that regard, seasonals worked great in April as I noted on Friday, with a good first half expected (SPX was up 5%) and not so much second half (SPX was flat).  It obviously doesn't always work so nicely, though.

So, anyway, let's get past the analogies.  First question to answer is whether there is something to "Sell in May"?  This chart I think speaks to that showing the difference in returns May-Oct versus the rest of the year (Nov-Apr) on the Dow since 1960.  I think it makes a pretty good case that most of your gains come from the rest of the year.  Importantly, though, the gains are NOT negative overall during this period, but they are more likely to be.  So you do make money on average May-Oct just not as much (an important distinction).

And the last 5 years May has been up more often than not.

Looking back longer term (in this case 20-yrs), you see though how returns have not been great in May (nor any month really through October explaining the first chart).  

But what if we control for other factors like post-election or first year Dem president?  Well Jeff Hirsch did this great study earlier this year that also shows that May shouldn't be expected to be super-great from a seasonal perspective no matter how you really want to slice it.  Of course, though, this doesn't "slice it" by massive liquidity within 12 months, a historically accommodative Fed, massive and increasing fiscal stimulus, economic reopening, etc., all of which provide a lot more fuel than normal.

Breaking it down further, I came across this neat seasonality study from equityclock.com.  As you can see seems to be a good time for Naz and treasuries.  In sectors staples, health care, and tech.  Again, these are just seasonal guides, and I'm not sure how these hold up this year, particularly tech.

And one other note on seasonality is that small caps have a tendency to outperform larger in May.

But, overall, a weak May-Oct would be consistent with my "peaks" thinking (that we'd see some .  That also would be consistent with the bull market roadmap I've shown before.  Note this was from around January so we're more like at the 1.1 year mark where you see the green line (the 2009-2010 bull) start to fall off.

But it would not really be consistent with what we saw at this point following the last two elections, as Mike Santoli points out in this chart.

So a lot to chew on there.

And moving away from seasonality, Bridgewater's co-CIO Greg Jensen gives some more to digest on the always interesting "What Goes Up" podcast from Friday (highlights are mine).  

Parts of the U.S. equity market are in a bubble, but shorting too early is the “easiest place to die” for an investor, according to Bridgewater Associates LP’s co-chief investment officer Greg Jensen.

And we have six gauges of a bubble that we use all over the world. Then you could apply it to cryptocurrency. You can apply it to anything you wanted in the world to stocks, to bonds to anything. Our basic scoreboard is: Are prices high relative to traditional measures? Are prices discounting unsustainable conditions? So, as an example today, there’s something like 10% of stocks that are pricing in more than 20% revenue growth and margin expansion. If you look at history, 2% of stocks actually achieved that. That’s an extremely hard thing to do.... So that’s an example of discounting unsustainable conditions. They can’t, as a group, actually achieve that condition.

The third thing is new buyers entering the market. How many new buyers are there? How big a part of the market are they? There’s the broad sentiment measures. There’s purchases being financed by leverage and buyers and businesses sort of making extended forward purchases. That’s all part of our checklist for a bubble. And you see today a fair amount of the equity market in the U.S. in a bubble, but not the aggregate.

Where’s the money coming from? Who are the buyers and sellers? What are their balance sheets? How much more money can they put into this bubble versus how much income they’re getting and when does that start to flip? And so for us, that process of being able to look at the balance sheets of the buyers and sellers and think about when they’ve been stretched to an extreme -- where they won’t have the money, where there’s more supply coming than possible demand... So the third part is be careful and be conservative in your thinking around the ability to time those things, because that’s kind of the easiest place to die in asset prices is trying to be short a bubble too early.

Here's a link to the article if you want to ready more or get a link to the podcast.

https://www.bloomberg.com/news/articles/2021-05-01/bridgewater-co-cio-sees-fair-amount-of-stock-market-in-bubble

Anyway, enough of that, here's some other random stuff from the weekend:

A benefit of asset inflation is ability to retire unlike what we saw for much of the recovery from the GFC.

Also giving better consumer confidence.

And, looks like it might be time to ditch the sweat pants (sigh).

And advertising is back (although we kind of knew that from Google and Facebook earnings).

And sounds like the Berkshire meeting might have had a bit of testiness this year.

With some interesting thoughts on oil stocks and climate change.

And some caution about Robinhood.

While Elon Musk notches $32B performance bonus.

As Iranian talks continue to make progress.

Leading Iran to except to triple exports (to be clear it would take a while to ramp up to this level, and OPEC would likely have something to say about that).

And, a solution to high lumber prices is printing your house?

And our biggest event yet.

And, finally, an unbelievable story in the WSJ about a sailor who's been trapped on a ship due to bureaucracy for 4 years.

To see more content, including summaries of key economic reports and my morning and nightly updates go to https://sethiassociates.blogspot.com