Monthly Market Report - May 2016

27th April 2016

With commentary from David Stevenson

Quantitative easing and monetary experimentation by central bankers has had a peculiar effect on markets. It's almost acted a bit like a narcotic, lulling investors into a set of behaviours that has become increasingly abusive over the last eight years. As soon as markets sense a withdrawal of stimulus, there's the inevitable tantrum followed by professional intervention. But going cold turkey is barely ever mentioned i.e. pulling away all intervention to enable a full recovery. Instead central bankers begin to discuss ever more outlandish ideas including Milton Friedman's legendary helicopter money idea, which has come back into the debate after a recent speech by Ben Bernake explaining how it might work - and what its limitations might be. You can see the speech here.

Obviously other forces are at work including the close relationship between oil prices and equities, but the overall soporific effect is something akin to an investment version of the ground hog day moment where we wake up and say "Hey haven't we been here before?" And so we find ourselves charging through the spring into the summer after a market rally, which has in turn followed a nasty winter where investors got the jitters about an impending recession. Sound familiar??

So letís be clear about what's changed. In summary, very little. The global economy is still growing but not at a very fast rate. The US Federal Reserve would like to raise interest rates, but not by very much. US equities still look expensive and Eurozone equities still look cheap. China is still trying to manage a massive restructuring without falling into a recession. Much more importantly all the worries that surround the global economy haven't gone away. Systemic risk is still high and there's alarming evidence that US corporate earnings growth has stalled. But the US economy still looks to be in reasonable shape, as does the UK, bar Brexit. In sum, nothing has really changed and yet nothing is very cheap. In this scenario surely we're about to see as repeat of pervious market behaviour where investors start to fret over the summer? Sell in May and Go Away! The chart below is from the popular investment website Business Insider and shows the success of a strategy that avoids markets in the summer - and goes long just seven months a year.

Download the full Monthly Market Report here.
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