The old market saying "sell in May and go away" may have a ring to it, but is it actually valid advice? Unsurprisingly, the answer is no. While the saying relates to the notion that the stock market is weaker during the summer, seasonal portfolio changes are not sensible. Healthy stock market gains heading into May have historically been a good signal of a positive year for stocks.

 

The first quarter earnings season has come and is nearly gone. Overall, it is looking as though the rate of earnings growth has declined year over year, for the second consecutive quarter. Clearly, that’s not great news. But, relative to low expectations, the results can be characterized as being “not that bad”. Moreover, the declines have been modest and come after a few years of very strong growth. Importantly, the commentary from management teams has been reasonably balanced.

 

The markets were faced with another failure of a U.S. bank over the past week. First Republic Bank, based in California, had similar characteristics to the couple that failed nearly two months ago: regionally focused with a high proportion of uninsured deposits (i.e. greater than $250,000). Yet, markets largely shrugged off the news, believing it was a foregone conclusion. There may be other smaller banks that are vulnerable to deposit outflows and it may require more intervention from regulators; however, I believe these pressures are confined to a subset of the sector, and don’t present a larger systemic risk. I see three implications: 1) consolidation, which is already under way; 2) a further tightening of financial conditions as regional banks may be more selective with their lending practices; and 3) heightened regulatory scrutiny, particularly for banks of a smaller size.

 

The U.S. Federal Reserve raised interest rates by 0.25% over the past week. The U.S. Federal Reserve signaled it may be done with its rate hikes as it altered the language in its formal statement in what Chairman Jerome Powell indicated was a “meaningful change”. It indicated it will take into consideration the cumulative action taken so far and the “lags” with which rate hikes tend to impact growth and inflation.

 

Overall, these developments were positive. Corporate earnings haven’t been too bad, strains in the regional banking sector have been well absorbed by markets, and interest rates appear to be peaking which marks an important inflection point.

 

Enjoy your weekend.

Tim