May is traditionally a month for reflection in markets, with the adage “sell in May and go away” highlighting a historical trend of weaker equity returns from May to October compared to the year’s end. However, current market dynamics influenced by social media and geopolitical events call for a more attentive approach this year.
"Sell in May" originated in an era long before Bloomberg terminals, exchange traded funds (ETFs) or global capital flows. London’s financial class would leave the city for the summer social season, thinning market liquidity and often suppressing returns. History gives us echoes rather than templates, but it is striking how many such sayings persist long after the conditions that created them have faded.
And yet, investors still reference it. Why? Because it taps into a deep behavioural instinct: the desire to identify a simple rule that removes uncertainty. If only the calendar could tell us when to take risk and when to retreat.
We know markets aren’t that obliging. But we also know that enough investors believing in a pattern can make it appear true in the short term. The market, as I’ve written before, is as much about expectations as it is about economics.
Clearly, the dominant commodities story of recent months has been the conflict in the Middle East, and the resulting closure of the Strait of Hormuz (through which ~20% of global seaborne oil trade passes).
Although the situation is pretty volatile, commodity markets have seemingly been calmed by reports of negotiation, deal making and constructive comments all suggesting that the Strait could reopen in quite short order. Brent Crude ended April with a big $10 intraday price move, closing at $114 and the market has fallen back to close to $100 by the end of the first full week of May.
The direction of travel is positive. One learning we took from the re-opening post Covid was how long it could take snarled up supply chains to detangle. In this instance, a timely reopening could help to minimise the snowball effects from the closure. It’s worth noting that longer-dated crude oil futures are still trading around $2-3 more expensive than where they even at the end of April. This suggests that the market is expecting a higher level of disruption to energy markets in the years to come.
While the energy story will have most impact on fixed income markets (given the feed through of inflation), equity markets will generally be driven by earnings reporting in the aggregate. We like to check in on these reports and this quarter’s earnings have so far been strong.
With over 80% of S&P 500 companies having reported, aggregate earnings growth is coming in at 25.4pct year on year (improved relative to last quarter), as have the level of positive surprises versus analyst estimates. Sectorally, these results have been consistent throughout – healthcare has been the laggard with pressure felt in the larger pharma companies.
The big tech companies have delivered another quarter of brilliant growth. While Nvidia is yet to report, the other 6 of the Mag7 have delivered year on year earnings growth rates in which Microsoft and Apple ‘only’ managed 21.8pct and 23.4pct respectively. The other companies reported growth rates well over 50pct with Alphabet the standout at over 80pct y/y growth. Both Alphabet and Microsoft’s results were improved by revaluations of investments in largely AI-related investments but even still, the operational results were generally impressive. Likewise, the capital expenditure story from these companies continues apace with the big tech firms increasing their spending commitments – partly as a function of increased cost of chips but also reflecting continued strong demand from underlying clients.
Overall, the reports were encouraging although of course the earnings reflect corporate activity that occurred largely before the start of the conflict in the Middle East and so as we go through subsequent quarters we will see how higher energy costs impact demand or margins.
Closer to home, the focus this week has been squarely on UK politics. As I’m writing, voters across England, Scotland, and Wales go to the polls in what amounts to the most significant electoral test of Keir Starmer’s premiership so far. What used to be a two-horse race has become something resembling a five-way tussle, with Labour and the Conservatives bracing for heavy losses to Reform UK on one flank and the Greens on the other.
What markets are watching is what the results imply for political stability and, critically, the fiscal framework. UK gilt yields spiked earlier this week amid reports that a group of Labour MPs is planning to ask Starmer either to resign or to name a date for doing so. We’re not quite at the stage of measure Starmer’s remaining political tenure versus the shelf life of a lettuce but should there be a challenge, a new Labour leader likely means a new Chancellor; a new Chancellor under pressure from the left means looser fiscal rules; looser fiscal rules mean higher borrowing. Memories of the 2022 Truss mini-budget are still relatively fresh and gilt investors are already pricing higher rates given the higher sensitivity the UK economy has to energy price inflation.
Interestingly, the currency options market, for its part, has been remarkably relaxed. Volatility pricing around the election date shows only a minor kink and low levels of volatility overall, suggesting sterling traders have been rather more preoccupied with crude oil than with the parliamentary Labour Party. For now, then, there is a some disconnect between political noise and market pricing, and we shall see where this ends following the results.
Overall then, the macro backdrop is more complex than equity markets have perhaps fully acknowledged. Earnings have been reasonably strong, but we need to continue monitoring for the lagged impacts of the commodity price shifts. Indeed, this commodity picture is still contingent on a diplomatic resolution that is still being drafted. And UK political risk deserves a little more monitoring in the near term given its potential read-across to fiscal policy and gilt yields.
The summer months may yet deliver the Middle East resolution markets are hoping for, with a meaningful tailwind for risk assets. But in an era when a single social media post can move markets more than the changing of the seasons, perhaps the old adage is best reframed: don’t sell in May but definitely pay attention.
Sacha is a portfolio manager of the Quilter Investors Cirilium and Creation Portfolios. Prior to joining Quilter Investors in 2011, Sacha worked at Broadstone with their team of economists before moving into asset allocation and fund manager research.
Sacha is a CFA charterholder and has also completed the Chartered Alternative Investment Analyst qualification. Sacha has a degree in Maths from the University of Bath.
