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Carlsquare weekly market letter: Sell in May and stay away?

  • Oil is falling back again, making way for lower interest rates and a new leg up for the stock market. This is in line with our plan – is it time to buy or cut back?
  • We take a step back and remind everyone of the importance of taking a holistic view of portfolios. Inflation or no inflation is the big question right now and to hedge against inflation, commodities are an alternative hedge

One of the oldest aphorisms on Wall Street – “Sell in May and go away” – is that it is in investors’ best interests to sell their stocks at the beginning of May and return to the market at the beginning of November.

As you can see from the chart above, May to October (with the exception of July) are all historically weak months. Playing the stock market is essentially a winter sport.

But not all assets behave in the same way. The commodity copper has a different seasonality, as seen above, with strong months in July, November and December.

Asset management is about reducing risk in a well-diversified portfolio. The main asset classes are equities, bonds, property, commodities, currencies, alternative investments and hedging. A typical portfolio is often a mix of 60-75% equities, 20%-35% bonds and 10% alternatives (including commodities and property).Insurance companies are obliged to pay out a certain amount to pensioners in a few years’ time. This means that they have historically held a large proportion of bonds in their portfolios.


Source: Carlsquare.

Larger investors tend to rebalance their portfolios at different stages of the economic cycle and in times of global unrest. In recent years, the correlation between the price movements of different stocks has increased. This makes it important for portfolio managers to find assets that have a low correlation with equity markets.

Finding uncorrelated assets is becoming increasingly difficult as asset managers tend to use more of the same strategies and computer trading (algo trading) becomes more dominant.


Source: Carlsquare, inspired by Söderberg & Partners.

Equities are broken down by geographical region such as Europe, North America, Asia and other emerging markets. US equity markets account for around 50% of the weight in global equity indices. Other countries’ stock markets are much smaller, with Japan accounting for 7% of global equity market capitalisation, the UK 6%, France, Switzerland and Germany 4% and China just 3%. In the case of the US and China, these figures can be compared with 26% and 17% of world GDP respectively. The regional weighting also gives a currency exposure. From a Swedish perspective, a global equity portfolio is a hedge against a weak SEK.

The Magnificent seven stocks (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms and Tesla) represent 29% of the S&P500 index. An asset manager could allocate a proportion of equities to sectors with expected growth return above average, such as Information Technology and Health Care. A portfolio manager should have about 15% of a global equity portfolio in the US Magnificent Seven just to be index neutral. Another (more common) strategy is to have a portfolio that closely tracks a local equity index. The above makes a distinction between the performance of value and growth stocks.


Source: Carlsquare/Stockcharts.

Bond loans are usually low-risk investments that pay interest on a quarterly or annual basis. When the bond matures, the issuer repays the bondholders the full amount of the loan.

As can be seen from the chart above, bonds have been bad investments for the last three years as inflations has ticked upwards.

Source: Carlsquare/Stockcharts.

The HYG ETF above tracks the performance of high yield bonds in North America. HYG behaves more like the stock market.

One of our main findings when looking at the performance of equities, equity indices, bonds, real estate and commodities is that the latter, especially gold and soft commodities, have acted as the best hedge against inflation. After all, energy, food and materials are often the main drivers of inflation. In the 1970s, the last time we had a significant rate of inflation, the main trigger was the oil price, which is controlled by the Opec countries.

Commodities can be divided into metals and soft commodities (food and food ingredients)

Gold has a special status as a precious metal. It is seen as a good hedge against rising inflation and recently gained a lot of ground.

The copper price has historically been linked to global industrial production, where China has been the largest buyer of industrial metals since around 2000. Silver is another example of a metal linked to industrial demand, but also to computer performance for AI applications due to its excellent conductivity.


Source: Carlsquare/Stockcharts.

The crude oil market is an oligopolistic and highly politicised market, with the US, Russia and Opec as the dominant players.

Soft commodities (mainly food and food ingredients) are mostly affected by weather conditions and crop diseases in the larger producing countries (often in the global south). Any disruption to these conditions tends to lead to shortages and price increases in the soft commodity in question.

Among the commodities included in the DBA – Invesco DB Agriculture Fund, cocoa and coffee futures have been the biggest contributors to the YTD rally. These account for just under 40% of the fund’s total value at the time of writing, with live cattle in third place at ~10.4% of the fund’s total value.

Cocoa has been on a parabolic rise that has been covered extensively, including by major news outlets. With almost 60% of cocoa grown in Côte d’Ivoire and neighbouring Ghana, supply is more vulnerable to shocks than other commodities. With heavy rains in normally dry periods, diseases such as black pod and swollen shoot virus have devastated crops and sent futures prices soaring.

The FTSE index (London Stock Exchange) acts as a defensive investment with a high proportion of materials, food, and pharmaceutical companies.

Source: Carlsquare/Stockcharts

Gold is traditionally seen as a inflation hedge, and is also breaking up.

Property is primarily used by insurance companies and other institutions to gain exposure to an asset class that has historically yielded higher returns than bonds. A fully let property provides a predictable cash flow, with rental income tending to rise in line with inflation. The change in the market value of a property is primarily influenced by the growth in rental income, combined with changes in the yield required by investors.

Years of low interest rates have left the property sector over-leveraged, especially in Europe. Therefore, the real estate sector needs capital injections, including transactions in which properties are sold by companies with higher debt to owners with more equity.

Equities are more liquid and therefore rise and fall in price more quickly than property. This leads institutions to buy property late in the cycle when prices are already high.

Back to the question of seasonality. Is it time to get back in or sell more?

Oil has started to trade lower again as demand is a little weaker and US inventories are building up again.


However, if we look at the daily chart, we can see that oil is now testing the MA100, which could be a support level.

Interest rates fall when inflation expectations fall. Note that the 10 year yield is now trading at the support line of a rising wedge. If rates rise from here, this could be the catalyst for the equity market to turn lower again as equities are very interest rate sensitive at the moment. In the coming days there will be several bond auctions in the US and the demand for these will determine the outcome for rates and equities.

With lower interest rates, we see a new leg higher for the equity market, with technology leading the way.

From a technical point of view, there are two developments to consider. The recapture of the MA50 is positive for the equity market. If oil prices continue to trade lower (or at the same level), the turnaround for a new high in the stock market could be in place. Note that the MACD on the lower chart is giving a buy signal.

However, we are more inclined to see the S&P 500 making a new lower high, with another leg higher in interest rates as the catalyst. This would mean a continuation of the downtrend for the stock market.

Unfortunately, it is too early to tell which scenario will play out. We have to take it one day at a time.

Happy trading!

Q1 2024 earnings season

As of Friday 3 May 2024, around 400 S&P 500 companies (80% of all companies) have reported their Q1 2024 results. 77% have reported positive earnings surprises and 61% have reported positive revenue surprises.

The average earnings growth rate for S&P500 companies for Q1 2024 is 5.0%. This compares with earnings growth of 3.4% ahead of Q1 reports on 31 March 2024.

Analysts now forecast earnings growth for S&P500 companies of 9.6% in Q2 2024, 8.4% in Q3 2024 and 17.1% in Q4 2024.

As can be seen in the chart below, Healthcare has been the best performing sector in terms of Q1 earnings surprises, followed by Information Technology and Consumer Staples.

The following two tables shows 56 major US companies that have reported quarterly results in the last two weeks, along with the actual and expected EPS, the percentage deviation and the post-announcement price movement. The average EPS surprise is 9.5% and the median is 6.5% for all 102 reporting companies since 11 April. The post-announcement price movement for 102 US companies is 0.2% on average and 0.5% on median.

The next two tables show the 54 OMX companies that have reported since 24 April and their Q1 earnings, sales and new orders compared with expectations. The results of the 76 OMX companies that have reported since 27 March were mediocre, with 58% reporting better-than-expected results and only 37% beating sales forecasts. In terms of new orders, 57% of companies (eight out of fourteen) beat analysts’ pre-announcement estimates.

Week Ahead

Reports and event on Wednesday, 8 May:  Skanska, Securitas, Millicom, Hufvudstadem Sagax, Clas Ohlson (Sales figures for April), DNO, Bavarian Nordic, DFDS, Kojamo, Mandatum, Mowi, NKT, Sanoma, TGS, Torm, Veidekke, Arm Holdings, BMW, GEA, Anheuser BuschInBev, Emerson Electric, Shopify and Toyota.

We start the day with Statistics Sweden’s Services Price Index for Q1 and German industrial production for March at 8.00 CET. The Swedish Riksbank makes an interest rate announcement at 9.30 CET and holds a press conference at 11.00 CET. From the US, we get weekly statistics on oil inventories (DOE).

Reports on Thursday, 9 May: Lundin Gold and SoftBank.

China’s trade balance for April will be released at 5.00 CET. The Bank of England makes an interest rate announcement at 13.00 CET. From the United States, we get the weekly jobless claims.

Reports on Friday, 10 May:  REC Silicon, Allianz, CRH and Enbridge.

This macro newsflow begins at 1.30 CET with Japanese household consumption for March. It continues at 8.00 CET with Statistics Sweden’s Production Value Index, Household Consumption and Industrial Orders for March. At 8.00 CET, we also get the UK’s Q1 GDP and March industrial production. The minutes of the ECB’s policy meeting on 11 April will be released at 13.30 CET. One hour later, we get Canada’s employment for April. From the US, the Michigan index for May is due at 18.45 CET.

Reports on Monday, 13 May:  Bure.

Monday will see the release of German current account balance and Canadian building permits – both for March, as well as US NY FED inflation expectations.

Reports on Tuesday, 14 May: Köbenhavns Lufthavne, Salmar, Bayer, Vodafone, Home Depot, Alibaba, Foxconn, Nintendo, Sony and Tencent. Capital Markets for Assa Abloy.

We start with UK unemployment for March and German CPI for April at 8.00 CET. This is followed by Spain’s CPI for April at 9.00 CET and Germany’s ZEW index for May at 11.00 CET. From the United States, we get the NFIB small business index and the PPI for April, weekly Redbook retail data and oil inventories (API) weekly statistics.


The information in this presentation is based on what the publisher, Carlsquare, believes to be reliable sources. However, we cannot guarantee its content. Nothing in the presentation should be construed as a recommendation or solicitation to invest in any financial instrument, option, or the like. Opinions and conclusions expressed in the presentation are for the recipient’s use only. The contents may not be copied, reproduced, quoted, or distributed to anyone else. Carlsquare shall not be liable for any loss arising from any decision taken based on the information contained in this presentation. Past performance should not be taken as an indication of future results. Changes in foreign exchange rates may affect the value, price or income of an investment made abroad or in a foreign currency.

The analysis is not directed at U.S. Persons (as that term is defined in Regulation S under the United States Securities Act and interpreted in the United States Investment Companies Act of 1940), nor may it be distributed to such persons. The analysis is not intended for natural or legal persons where the distribution of the analysis to such persons would involve or entail a risk of violation of Swedish or foreign laws or regulations.








Carlsquare weekly market letter: Sell in May and stay away?