April brought tumult to the markets, as evidenced by the S&P 500's 4.2% decline, yet May has ushered in an unexpected rally, with the index bouncing back by 3.7%. This abrupt turnaround prompts investors to question the reliability of the age-old wisdom encapsulated in the phrase "Sell in May and go away."
The recent surge finds its roots in lackluster US employment reports, reigniting speculation of a potential summer rate cut by the Federal Reserve. Futures markets have swiftly adjusted, now indicating a 13% probability of the Fed maintaining interest rates until year-end, a notable shift from the 27% probability recorded at April's close.
However, it's crucial to acknowledge the underlying strength of the US labor market. Across the Eurozone, a resurgence in retail sales in March, marking the first uptick since September 2022, suggests economic resilience. Additionally, purchasing managers' surveys hint at a robust economic expansion, nearing a year-long high. Meanwhile, Britain's exit from recession and its sharpest growth in two years underscore a broader global economic rebound. Notably, China's recent quarterly performance surpassed expectations, contributing to a prevailing sense of economic equilibrium, despite inflation rates lingering above the 2% mark.
So, what factors precipitated April's sell-off and May's swift rebound?
One often overlooked aspect lies in valuations. As March drew to a close, the S&P 500 boasted commendable performance, particularly fueled by the resilience of the consumer spending sector.
Of course, macroeconomic indicators remain pertinent. The delicate balance between economic growth and inflation persists, as evidenced by the enduring challenges posed by inflation rates hovering above the desired threshold of 2%. Nevertheless, recent history suggests that elevated borrowing costs don't invariably stifle economic momentum.
As investors navigate the complexities of the financial landscape, they ponder whether traditional market maxims hold sway in an era defined by dynamic shifts and unforeseen catalysts. As May unfolds, the resilience of markets against a backdrop of evolving economic narratives serves as a testament to the enduring adaptability of global financial ecosystems.
