May 5th, 2025 - Sell in May, but stay around.

Financial markets love decades-long adages and the "Sell in May and go away" is one of them. The history behind it is that traditionally stock markets are performing well at the start of the year, but as the summer kicks in there is profit taking and position closing which leads to market corrections and then, there is eventually a rebound during the last part of the year. Hence it would be ideal to sell in May, go on vacations and rebuild positions in September (although October has been associated with major lows), to enjoy the rally till Santa arrives. If only investing was so simple ... And circumstances have changed a lot since this pattern was first observed. And although some of the summer months have indeed produced sub-par or negative returns, there is no guarantee that every calendar month will evolve as history and tradition has it.

In April, global equities registered their third negative month in a row, which begs the question what comes next. The situation would have been much worse if they had not staged a remarkable rally from deeply oversold positions in the middle of April. The Eurostoxx 50 and the S&P500 have rallied almost 15% from that low in a matter of two weeks, which means that equities have recovered all the losses suffered by the April 2nd "liberation day" announcements. A major negative catalyst which caused the steep drawdown has been temporarily removed, namely the huge reciprocal tariffs, but there is a deadline for the temporary relief (June 30th) and they could come back. We should not forget that the 10% unversal tariff has kicked- in and the 145% on Chinese imports is also in place. Under these circumstances equities are now back at being on the neutral-to-slightly-expensive side, if one takes into account that the global economy is getting in a slowing down period.

The rally has been built on hopes that in the end, there will be new trade deals and even the 10% universal tariff will be abolished. Even Gold has plummeted 10% from its recent peak, in another sign that investors are getting more comfortable. And indeed, there were some positive signs last week: The European Union proposed to increase its purchases of US goods by 50bn$, primarily in the oil and gas industry. China also appeared to be softening its stance by leaking to the state media that "we see no harm in starting negotiations with the US". Trump also announced that a deal with a major economy is imminent, without naming the country, but people thought it is either India or Japan. Of course days passed and no deal was announced, and on the contrary Japan claimed that it is still far from accepting the US terms of a proposed deal. The world now knows that Trump's negotiating power has weakened after financial markets started abandoning US assets (bonds, equities and the dollar) and hence the impacted countries would be less willing to accept any deal offered. Trump, at the same time, has seen his popularity plummet and he is watching all macroeconomic indicators flashing recession.

Selling in May, now that prices have risen, makes a lot of sense, but going completely away does not. Volatility is bound to remain high and investors should remain vigilant to capture again opportunities that will arise on a regional, sectorial and stock level. But even more important, there are some "anomalies" already in equity markets that could provide opportunity for reshuflling portfolios in the coming days or weeks. Taking Europe for example, Financials remain the top performing sector (+19%), which means that investors should feel confident with the prospects of the economy. But at the same time, the defensive sectors such as Utilities (+15%), Communications (+14%) and Staples (+10%) are also at the top of the list, which is rather odd. Even more bizarre is the fact that economic sensitive sectors such as Energy (-3%), Discretionary (-6%) and Materials (0%) have severly underperformed, which means that a recession scenario is the main theme, not economic expansion. But if the recent rally is based on the hope for a brighter future, then the above performances will soon be reversed and opportunities in the so-called cyclical sectors are already there to capture.

The Q1 GDP preliminary publications revealed that Eurozone grew more than expected and the US fell into small contraction. The data came at a time when European stocks have significantly outperformed their US peers, but as mentioned above, the European economic-sensitive sectors have not participated in this rally. The Eurozone grew by 0.4% on a quarter-over-quarter (qoq) basis , double the rate that was expected (+0.2%). On a year-over-year (yoy) basis, it grew by 1.2%, as it did in the previous quarter. The US posted its first negative GDP growth on a qoq basis (-0.3%) since the pandemic vs the +0.8% expected and grew by 2% on a yoy basis. To be fair, we should note that the US GDP was impacted by a surge in imports by companies who wanted to build inventories ahead of the tariff implementation. But overall, we see that the economy is now at a much softer patch than six months ago, when Trump was elected.

The US labor market data once again painted a mixed picture. The important April non-farm payrolls rose by 177k, much higher than the 130k expected and in stark contrast to the private survey compiled by ADP which showed a mere 60k job creation, far less than expected. The previous month's payrolls were revised downward by more than 40k, however, making the 177k figure not as high as the healine beat would suggest. Uemployment remained at 4.2%. The weekly jobless claims jumped to 240k, vs the 220k level that they have been hovering around for many weeks, while the JOLTS job openings fell to 7.2mn, much worse than expected and at the lowest level since the pandemic. All in all, the labor market has weakened but not at an alarming rate yet.

Eurozone April inflation was unchanged at 2.2% y/y, slightly above consensus of 2.1% y/y. Core inflation rose 0.3pp to 2.7% y/y, exceeding consensus expectations of a smaller increase to 2.5% y/y. The rise in core was solely driven by the 0.4pp jump in services inflation to 3.9% y/y. Goods inflation remained unchanged at 0.6% y/y. Looking ahead and due to the base effect we would expect headline inflation to temporarily dip below 2% in May and then hover around 2% for the rest of 2025, giving the ECB plenty of breathing space in order to cut rates again, if needed.

In the US , the March PCE Deflator index edged down to 2.3%, falling 0.04% in March, as expected. It should be noted that the -4bp monthly change was well below the +37bp change in January and the +44bp in February. Core PCE prices increased 0.03% for the month, with the 1yr rate falling to 2.6%, which is the lowest level since March of 2021, at the start of the inflation surge. Over the next few months of course, we would expect all measures of price inflation to surge upward if current tariff policies remain in place.

Bonds remained well bid throughout the week, despite the equity market euphoria. The 10-yr US Treasury yield reached a low of 4.15%, after the negative GDP data and the weak labor market data, until Friday. The robust non-farm payrolls but also some signs of price increases within the GDP report caused profit taking and the yield returned to 4.30%. The German 10yr dropped to a low of 2.45% before returning to 2.53%. As mentioned in our previous weekly review, we would not chase the bond market at those levels, but wait for yields to rise to more attractive levels to buy again.

Chart of the Week : The S&P just had three consecutive negative months, as in 2023.

The below chart shows the monthly performance of the S&P500 for the last four years. The three consecutive month drop is a rather rare event, that only happened again in the summer of 2023. If history is any guide, it is quite unusual to have a fourth month of drops unless we enter a severe bear market. Back in 2023, the S&P500 rebounded strongly in the months that followed. Having said that and given the current uncertaintly levels on growth, tariffs and inflation, we should assume that we still have a volatile year ahead, which could resemble more 2022, in terms of monthly wild moves, rather than the smooth 2023-2024 period.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

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• Sources: Chart of the Week : FactSet/KSH