Sell in May and go away? Not so fast…

In this video, Bernhard Koepp shares his perspective on the stock market based on productivity growth, potential Fed rate cuts, and forecasts for strong corporate earnings.

Hi there. This is Bernhard Koepp at C.J. Lawrence. It is May 24th. As we get ready to go into the Memorial Day weekend, I just wanted to review the markets at the end of May. There’s this old adage in Wall Street that says, “Sell in May and go away.” I wanted to review some of the data to see if that is really something you should be doing.

If you look at the data over the last 10 years, you had only three periods between end of May and the end of the year where you had negative returns. Those three years on average were negative 4.8. In the other seven years where you had positive returns from end of May to end of December, you had on average a return of 14.2%, so quite a difference.

If you look at a ten-year period, with everything we’ve gone through — we’ve gone through a bear market, we’ve gone through a pandemic — the market tends to skew positive over longer periods of time. We have to be a bit careful when we look at these sayings like, “Sell in May and go away.”

3 Reasons to Stay Invested

Let’s just review three reasons why we continue to want to stay long in this market. These really are the drivers of the market and the drivers of the economy.

#1 Productivity-Led Economy

Number one, this is a productivity-led economy which is very important. I’ve been doing this for 30 years now. I’ve seen a lot of markets.  The most powerful markets we tend to see are when we have productivity growth rising in the U.S. economy.

If we go back to the 1990s, that was a time in — if you look at the ’93/’94 period — we were just coming out of the savings and loans crisis. At that time, we had some 1400 banks (savings and loans banks) and thrifts going bust. It was not a very optimistic time, but we had something happening in the economy, which was technology. We were starting to build the internet and it was interesting that in the ’94/’95 period, when it was clear that we were going to get productivity tools that were technology driven, this would set up a very powerful economy and market. Going through that productivity growth period from ’95 through really 2000, it set up a pretty remarkable market.

We think we’re in a similar period now. If you look the last reading of productivity which was about 2.9%, we’re getting about 2.9% productivity growth out of the economy.  If we add 1%  population growth, that gives us about 3.9% of GDP growth that is free of inflation. We’ve had a lot of debates and there’s a lot of strategists and economists debating where we are in the inflation cycle. We’ve come from a 9.1% reading at the high to about 3.4% at the moment. But what is really important is that we are now seeing productivity growth going up.

Reason #2: The Federal Reserve & Inflation

Why is that important? It’s for two reasons. One, it drives earnings. The margins in our companies are becoming more productive. They’re becoming more efficient. It’s actually interesting, we’re seeing that profit margins in the S&P have actually stabilized, and in some cases, risen. That’s important. But it’s also the fact that it gives the Fed, and that is Jay Powell, the backing to say, even if we don’t hit the 2% inflation target that they always talk about, that they can lower rates without overheating the economy.

Let’s review. If we have 2.9% productivity growth plus 1% of population growth, it gives us about a 3.9% leeway of GDP growth that is not inflationary. If we think about where we are in terms of GDP growth, we’re at around 3%, and that is well within the bounds of non-inflationary type of growth. If we look ahead, is Jay Powell and the Fed going to lower rates going forward? We think they will.  We have an election coming up, which may complicate the timing of this, and we have more data coming out. If we pull back a little bit and look at things like core inflation, they are actually trending down. We think we will get at least one rate cut this year, which sets up a pretty decent market.

Reason #3: Earnings Growth Potential

I mentioned earnings growth. My partner, Terry Gardner, put out a very interesting YouTube, the last one that we put out at C.J. Lawrence, which was to highlight that we have now a forecast for three consecutive years of double-digit earnings growth in the S&P 500. This is looking at 2024-2026 forecasts. Each of these are actually showing double-digit earnings growth for the S&P 500. That data may be wrong. These are projections, forecasts, but if you look at history, this has only happened five times since 1950, and it’s really a remarkable kind of configuration if we can get three years of earnings growth consecutively that are double-digit. It’s very rare.

If we get that going forward, we are really quite bullish about where equities can go. We got some very important earnings news out of companies like Nvidia, and these are these powerful product cycles that are driving productivity, which is generative AI.

But we’re also seeing it out of companies that are in the healthcare sector. It’s not just technology, it’s also healthcare. There is a very powerful product cycle in the so-called GLP-1 drug category. These are the weight loss drugs that companies like Eli Lilly and Novo Nordisk have developed. We’re just at the beginning of that. They are just building out production to be able to deliver the product and we will be going from injectables to pills at some point. There is a bit of a tug of war between the insurance companies and people using these drugs, but it’s setting up a very powerful product cycle also on the healthcare side.

Bullish Outlook

All of these things make us quite bullish going into the rest of the year. Going into the Memorial Day weekend, we are quite positive on the markets, so we would not sell in May and go away. Hopefully, that will give you some good news going into the Memorial Day weekend. We wish you a great holiday and we’ll see you at the next video.

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