If we look at the historical data, the old saying of “Sell in May and go away” isn’t exactly very accurate as the markets don’t always go down in the May-Oct period. Unfortunately, this has been one of those Mays in which the markets had a tumble. The MSCI All Country World Index (which includes Global and EM Equities) fell 6.1% in May, and the S&P 500 fell 6.6% in May, as both indices notched their first monthly decline of the year.
Putting it into perspective though, the MSCI ACWI is still up 9.4% for the year and the S&P 500 is up 9.8% for the year (in USO). Equities are volatile, but please bear in mind that unless you are invested in a 100% equities portfolio, you are holding a portion of your assets in bonds, which have done very well in May. 10-year treasury yields have hit 20-month lows (bond prices rise when yields fall) to about 2.1%. What this means is that prices of the bonds in your portfolio have been going up, which protects a part of your portfolio from the equity market volatility.
Incidentally, as we are invested in global equity portfolios, the month of May has been good for the US dollar, and consequently has helped to mitigate a small portion of volatility for our SGD based clients. The USO strengthened about 1% in May (against the SGD), so this has benefitted the global equities allocation in our portfolios, which counts for a significant (>50%) USO exposure.
What has been driving this market lower? A re-pricing of the probability of a protracted trade war between the US and China. Prior to May, tensions appeared to be dissipating and a deal was expected to be signed sometime in May as negotiations appeared to be on track. Since then, there has been a dramatic breakdown in talks, and the timeline for a resolution of the trade war is now uncertain. Given that this trade war impacts the two largest economies in the world, any delay will have an impact on the global economy. According to IMF data, global GDP growth fell to 3.2% in 2H 2018 due to trade tensions. With the situation likely to remain unresolved anytime soon, the markets are pricing in an expected slowdown in the global economy. As we can see, markets remain very efficient at assimilating new data, and will move up or down accordingly. Even with the increased volatility, we believe that it is difficult to try time markets consistently, and that a long-term investment plan is the best way to have a successful investment experience.
While we cannot predict the future, we can always look at the data. Successful businesses generate returns for investors, and we are investing in real businesses. For example, not every stock has been falling in May. The Hershey Company (maker of Hershey’s chocolate), saw its shares go up about 5.6% due to a favourable set of results in 1 Q 2019. Similarly, other companies will adjust to the economic situation, and continue to operate as long as there is demand for the goods or services they provide. That is why over 10-year rolling periods, the data shows that equities would outperform T-bills at least 85% of the time.
The upside to all this is that stock prices are generally lower than they were at the end of April and buying at lower prices always improves your expected return. If you are on a regular savings plan or have plans to top up your investment amount, lower prices help to reduce your average price, allowing your portfolio to benefit from any future recovery. As always, our advisers are available to answer any questions you might have, so please contact them if you have any questions. Thank you for your continued trust and support.
Solutions & Investment Team
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