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It Didn't Feel Like It, But May Was a Win for U.S. Equity Bulls

  • S&P 500 rises 2.2% in May despite growing geopolitical angst
  • Average down day is 21% bigger than the average up day in 2018

Beset with political drama in Italy, trade angst in China, a surging dollar, a plummeting Treasury yield and weakening economic data in Europe, equity investors in the U.S. still managed to muddle through.

In fact, as far as Mays go, this was a good one, the best for the S&P 500 Index since the bull market began. The benchmark for U.S. equities rose 2.2 percent, the most since 2009, and the Nasdaq 100 jumped 5.5 percent.

One big reason was the performance of technology megacaps. Apple posted its biggest monthly rally since July 2013. Then on Friday, the iPhone maker, Facebook Inc., Amazon.com and Netflix Inc. all closed at all-time highs.

As ever, the ascent wasn’t easy. All told, the S&P 500 rose half a percent or more for six sessions, fell the same amount in four, and spent the rest of May trading sideways. Concerns from geopolitics to trade left few obvious entry points. At the same time, investors laid off the escape button, a sign tolerance is building for political headlines that have been whipsawing markets for months.

“No strong reason to buy, but no strong reason to sell, either,” said Andrew Adams, a strategist at Raymond James & Associates Inc. “There has almost been too much uncertainty, and investors have just thrown up their hands and said, OK, we’ll worry about this stuff when there is something specific to worry about.”

April Showers Bring May Flowers

Despite geopolitical uncertainty, the S&P had the best May since 2009

Source: Bloomberg

The month was rich in market-moving news. President Donald Trump announced a new round of tariffs on steel and aluminum imports. An Italian political crisis reignited fear of a euro breakup. The fate of next month’s North Korea summit in Singapore grew increasingly fraught. But for all the uncertainty, the Dow Jones Industrial Average added 252 points, the Cboe Volatility Index declined for a second month, and small-caps and the FANG Index reached record highs.

One reason 2018 has seemed like such a slog is that the pain from the occasional brutal session has exceeded the relief provided by the more frequent good ones. The average down day this year is about 21 percent bigger than the average up day, the widest gap since 2008.

It’s not like the market never rises. There were 57 up days in the first 100 trading sessions of the year through late May. The last time the S&P posted more days in the green in the first hundred days, in 2013, the index rose 16 percent, rallying for 62 sessions, according to Sundial Capital Research. The benchmark gauge is up 2 percent in the first 100 sessions of this year through late May.

“On the one hand, it’s great that the stock market can hold up so well in the face of these potentially negative developments,” said Matt Maley, equity strategist at Miller Tabak + Co. “But the fact that the big down days are more severe than the up ones tells me this long-term bull market is getting a little tired.”

`Green' Days Don't Matter

The S&P posted 59 up days in the first 100 sessions of 2018, but rose just 2%

Source: Sundial Capital Research

What could break the logjam? Bulls say they want progress in negotiations over the U.S.- North Korea summit scheduled for June 12. Failing that, investors may find comfort in smaller stocks that -- untroubled by overseas tensions have surged to one record after the next.

“Very strong earnings results and persistent upward revision to estimates likely overwhelmed policy fears on the whole,” said Gina Martin Adams, chief equity strategist for Bloomberg Intelligence. “Small caps are sending a very clear bullish signal about domestic growth, which is still generally beating out concerns about non-domestic stability.”

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