Darling Buds of May, Revisited
Why equities are resisting temptation.
The temperatures are starting to rise, Spring is in the air, and it is time for that question we ask ourselves every year: do we sell in May and go away? We have come a long way and global equity markets are now trading far above their pre-COVID highs. Most of that has to do with stimulus, lots of it, but lest we also forget our dreams of having entered a new paradigm. A world that is online, connected, in real time, digital, virtual, at home or travelling in our electric cars and everything is performed with the utmost of efficiency.
That’s fine, and the S&P 500 has gone from a low of 2200 in March last year to 4300 in just over a year. However, by all measures, things seem a bit too rosy for the realities on the ground. The global number of infections is still nowhere near declining, most of the world is still restricted from meeting indoors, and it does seem that the governments are spending quite a lot of money just to keep the wheels turning.
The other thing that seems troubling is that everyone is in. Allocations to equities are overweight by most, if not all, investment managers. Moreover, margin debt is at an all-time high, meaning people are not just long, but more so with money they borrowed from someone else. Nothing wrong with that, until everyone decides to make a dash for the exit at the same time. If sentiment ever does turn (in a galaxy far away) then it will make what happened with Archegos seem like a drop in the ocean.
To make matters even more complicated, we also have to consider what is happening with other markets. Government and corporate bonds have been getting hit as of late given inflation fears, which are now at the highest levels in decades. That money has to go somewhere and the flows we have recently witnessed certainly support the case for equities. However, rising yields also mean higher borrowing costs, and it is the reason people have been selling technology stocks (of all things) on any hints that interest rates may be on the rise. Where that would leave the property market is a whole other discussion.
Commodities have also gone up, that’s because they move more like equities than people may think, and the weaker US Dollar is adding fuel to the fire. Where that goes, nobody knows, and if it all sounds a bit much, maybe we should look at what the so-called “smart money” is doing. Turns out, insiders, the ones that work at the companies and should know how things are going, sold shares in record numbers in April. So did the hedge funds, who off-loaded more stocks in the last four weeks than at any time since 2008. Have I mentioned that Dogecoin is up 27,497% in the last year?