Calvert News & Commentary

Market View, Equities:
Why "Sell in May and Go Away" Did Not Come to Pass


By Natalie Trunow, Chief Investment Officer, Equities, Calvert Investment Management, Inc.

Natalie Trunow, CIO, Equities Natalie Trunow,
CIO, Equities

Equity markets proved resilient…

Equity markets proved resilient in the face of the old adage “sell in May and go away.” Most major global indices posted solid returns in May, supported by strong corporate earnings and improving, though mixed, U.S. macroeconomic data. Investors shrugged off the revised negative U.S. GDP growth in the first quarter, and while concerns about a potential hard economic landing in China are unlikely to abate any time soon, the growth outlooks showed signs of improving. For the month, the Standard and Poor’s (S&P) 500, Russell 1000, Russell 2000, MSCI EAFE, and MSCI Emerging Markets Indices returned 2.35%, 2.30%, 0.80%, 1.62%, and 3.49%, respectively. Large-capitalization stocks continued to outperform small-capitalization stocks, and growth stocks outperformed value stocks. The strong performance by growth stocks relative to value was also reflected in sector performance as Telecomms, IT, and Health Care were the top performing sectors during the month, while Utilities, Financials, and Energy sectors lagged.

…as earnings season finished strong…

Earnings season finished strong with 71% of companies in the S&P 500 beating Q1 earnings estimates. Importantly, top-line growth re-accelerated, as evidenced by 2.6% revenues growth on a year-over-year basis, up from 0.75% growth in the prior quarter.

Although Q1 GDP growth was revised down to -1%, investors were comfortable attributing the first quarter setback to harsh weather and focused their attention on improving economic data. The labor market continued to show signs of improvement, as seen by the downward trend in jobless claims and continuing claims in May. The housing recovery regained its footing after slowing in recent months with housing starts and building permits increasing more than forecast, indicating that housing activity may be rebounding from the winter doldrums. However retail sales reports were disappointing and consumer spending during the month unexpectedly slowed.

…and U.S. inflation picked up in May.

Inflation in the U.S. picked up during the month, but remained below the Fed’s 2% target. As the Fed continues to wind down its asset purchase program (QE), this acceleration did not prompt any change to the Fed’s current position. Despite widespread consensus expectations for interest rates to rise this year, market participants were surprised to see the yield on 10-year treasuries decline further in May, down to 2.5% after starting the year hovering around 3%.

Europe is recovering, but slowly…

Consistent with our position over the last several years, we continue to believe the recovery in Europe is going to be slower and more challenging than the consensus outlook expects. Data released during the month seemed to support this view as eurozone Manufacturing PMI declined in May and eurozone GDP grew just 0.2% in the first quarter, falling short of expectations. At the same time, inflation in the eurozone continued to fall and now sits at just 0.5%, though the recent softness in economic data and drop in inflation has increased expectations that the European Central Bank (ECB) will announce further easing measures at their upcoming June meeting.

…and China’s economic growth remains a source of investor concern.

Investors remained concerned about slowing economic growth in China as the country transitions to a more consumer-oriented economy. With the dollar strengthening and low inflation keeping commodity prices in check, it appears that, to some degree, the U.S. has benefited from weakness in China and other emerging markets. However, a sharper slowdown in China could prove troubling for global markets, especially given the unknown ripple effects on the global economy should the Chinese real estate bubble burst in an unmanageable way. For now, investors gained comfort in improved Manufacturing PMI reports released during the month and an expansion of China’s “mini-stimulus” policies.


We continue to believe that this economic cycle will be more protracted than usual given the depth and severity of the financial crisis that preceded it. Consistent with that, and recognizing that this protracted cycle will continue to be characterized by very slow rates of improvement, we think the U.S. economy has recovered and is now going through an expansion phase. What this may mean going forward is that economic growth may continue to be slower than usual for this stage in the cycle, but it should still prove robust.

Concerns about growth in emerging markets, and geopolitical turmoil to the headlines have effectively injected more risk into markets, with investors taking a more cautious approach toward equities as a result. In the short term, this has been positive for U.S. treasuries, evidenced by their strong performance year to date, and bond-fund inflows compared to equity-fund outflows. However, from a longer-term perspective, bond prices are likely to come under greater pressure as the Fed continues to wind down its asset purchase program.

The U.S. Federal Reserve will continue to focus on maintaining positive economic growth in the U.S. and will adjust the pace of its QE tapering accordingly. As we have maintained for some time now, a key consideration in the Fed's strategy remains the U.S housing market, which is a chief driver of U.S. economic growth. In view of this, we do not believe we will see much interest-rate volatility in the near term. Having said that, time will continue to work against low rates as the long-term trajectory has nowhere else to go, but up.

This commentary represents the opinions of the author as of 6/12/14 and may change based on market and other conditions. These opinions are not intended to forecast future events, guarantee future results, or serve as investment advice. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information. Calvert may have acted upon this research prior to or immediately following publication. In addition, accounts managed by Calvert Investment Management, Inc. may or may not invest in, and Calvert is not recommending any action on, any companies listed.

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