by Jason Norris, CFA
Executive Vice President

In the Summertime

As May draws to a close, equity investors were not treated well. Concerns over a slowing economy and heightening trade tensions with China weighed on investor sentiment. The S&P 500 fell over 6 percent for the month, which is the first negative month of May since 2012. In contrast, bond investors were treated well as interest rates plummeted. Specifically, the yield on the 10-year U.S. Treasury fell 0.30 percent for the month to 2.23 percent. This “flight to quality” is evident in recent mutual fund and ETF flows. The chart below which reveals that for the month of May (through May 21), investors sold over $16 billion of domestic equities in ETFs and mutual funds and redeployed the proceeds in bonds.

The selling of equities is consistent with the Wall Street adage of “sell in May and go away.” Historically, this was the result of the summer months usually delivering below-average returns. The chart below highlights monthly S&P 500 returns since 1960, compared with 2019 returns.

While the period from June through September usually delivers slightly positive returns, volatility is greater. In contrast, the fourth quarter is usually the best quarter for returns. A caveat: these are only averages and every year is different. For instance, just last year for the four months of June to September, return on stocks were up over 7 percent, while returns in the fourth quarter were a negative 15 percent.

Pushing Forward and Back

With the decline in rates, longer-term 10-year Treasury rates are now lower than the short-term 3-month Treasury. This has happened seven times since 1960 and six of those instances were followed by a recession. However, there is no clear-cut pattern in length of time between the yield curve inversions and either the onset of a recession… or its severity.

When analyzing inversions and stocks, there is not any one predictive factor. For instance, during the last three inversions (1989, 1999 and 2006), stocks peaked early, late and then post the inversion. One can argue that this time it’s different. With global interest rates at historic lows, U.S. rates have strong global demand, thus serving to push U.S. yields lower. While global growth is slowing, we do not believe that we are on the verge of a recession. Therefore, while we currently recommend a “neutral” allocation to equities, it is not yet time to underweight equities.

Week in Review and Our Takeaways

Stocks fell roughly 3 percent this week as tariff concerns increased on multiple fronts
Economic uncertainty increased as global PMIs declined and U.S. retailers posted relatively sub-par earnings results
These concerns led to a strong rally in bonds resulting in a 0.16 percent decline in the 10-year Treasury yield to 2.14 percent

Disclosures