MONTHLY MARKET MUSINGS

May 2024

Do April Showers Bring May Flowers?

We noted in last month’s Market Musings that the rhetoric of a market correction had been building and that the possibly of it becoming a self-fulfilling prophecy was looming. Since then while we haven't had a big correction, the equity market has taken a step back throughout April. The S&P/TSX Composite Index (TSX) has fallen roughly 2.0% and the S&P 500 Index (S&P) has dropped about 2.85%[1] from their recent all-time highs. While there is a portion of this dip that is attributable to profit-taking, the current economic data coming out of Canada and the U.S. is most likely driving much if this recent performance. Over the past few weeks, the U.S. put up some mixed economic numbers with a disappointing GDP print, consistently solid consumer spending data and higher-than-expected core inflation numbers. Meanwhile in Canada, signs are more clearly pointing to a slowing economic pace. The U.S. Consumer Price Index and the U.S. Personal Consumption Expenditure, both gauges of inflation, have stubbornly remained higher than estimates and this has led to a change in U.S. rate cut expectations. At present, the market is anticipating two rate cuts which is a far cry from the five rate cuts that were being forecasted by economists at one point. As a result, the U.S. yield curve rose quite a bit in April and this has put into question how closely the rate cutting cycles between Canada and the U.S. will track. We can be quite certain that both sides will cut rates this year. However, if we hypothetically see four cuts in Canada and two or less in the U.S., it will weigh on the Canadian dollar and the market until the U.S. Federal Reserve catches up and narrows that gap. The Bank of Canada (BoC) is obviously well aware of this divergence and given the interdependence of the two economies, there could be some potential negative implications on Canadian exports and the Canadian economy in general. This will be in the back of the minds of BoC officials as they move forward with their monetary policy. We have also just entered into the first quarter earnings season which could further soften bullish enthusiasm if companies fail to beat consensus estimates and report weak growth prospects and narrowing profit margins. As it stands right now, this does not seem to be the case as quarterly results from U.S. companies, thus far, have been mostly positive.

So with all that in mind and it now being May, does this mean we should abide by the “Sell in May and go away” mantra which proposes that investors take profit in May and stay out of the market until the final few months of the year. We would argue no. While the period of May to October does historically underperform November to April, it has been shown that the returns during this time are nonetheless positive returns on average. In fact, the S&P has seen an average total return of about 3.2% from May to October since 1990 and it has had positive returns over 75% of the time. By contrast, the period of November to April has been positive about 82% of the time with an average total return of about 7.8% since 1990. [2] This reinforces our prior stance that staying invested provides overall better returns over the longer term then jumping in and out of the market and in this case that doesn't just apply to market downturns but seasonal tendencies as well.

JAY SMITH, CIM®, FCSI

Senior Portfolio Manager & Senior Wealth Advisor    

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor