Should we sell in May and go away? The old Wall Street adage came about because in the short run, stock prices are driven by earnings surprises, and generally, the summer quarter, with vacations and such, is seasonally weaker, meaning it is more difficult to beat estimates and therefore catalyze stock prices. In the long run, the market is very influenced by macroeconomic issues and events. And we certainly have what feels like a binary event right up ahead- an end to the trade war with China, or not. The is a certain amount of optimism priced into the Market that a deal can be reached in the coming weeks. Naturally, a positive resolution will be helpful and most likely incrementally aid global growth, but no resolution will put pressure on growth and, in turn, the Market.
As far as current earnings performances go, things are generally positive though an obvious area of weakness has been the large cloud-based data centers where several very big players slowed or delayed incremental capital expenditures. Our bet is that this is just a one or two quarter digestion period and therefore an opportunity to buy those equities that have gotten hit on the near-term disappointments.
Finally, the Federal Reserve recently commented on the outlook for inflation, which remains stubbornly below their 2% target. They referred to this phenomenon as transitory. Yet the biggest deflationary secular trend in our lifetimes that continues to influence everything- the Internet is the culprit. This disintermediating technology has changed everything and if anything, is accelerating in its impact. So, if Fed members are fearful of inflation, they need not be. Said differently, the old school thinking that 3% or 4% GDP growth rates must will lead to inflationary forces is wrong! We can grow faster without inflation because of this enormously powerful force.