This article was written by Invesco PowerShares Senior Equity Product Strategist Nick Kalivas.
May is upon us, and as an old Wall Street adage goes, “Sell in May and go away.” True to form, the investment landscape is as confusing as ever in early May, with evidence of seasonal volatility in the equity markets.
Historically, the S&P 500 Index has posted relatively weak performance from April 30 through Oct. 31. In fact, from April 30, 1992 through Oct. 31, 2014, the S&P 500 Index has returned an average of 2.65% from April 30 through Oct. 31 of each year, compared with an average return of 7.65% from Oct. 31 through April 30 during this same period.1 Investors that have pursued a low volatility strategy, however, have been partially buffered from market weakness. From 1992 through 2014, the lowest volatility quintile of the S&P 500 Index outperformed the overall index by an average of 2.09% from April 30 through Oct. 31. 1
Contributors to market volatility
As we assess the market landscape in May 2015, I believe one risk facing investors is the strong US dollar. In one sense, a rising dollar underscores confidence in the US economy. A robust economy attracts investment from around the globe, but also makes dollar-denominated goods more expensive in foreign markets – weakening demand – while reducing the value of exports purchased in euros, rubles and yen.
Exacerbating the strength of the dollar is a growing disparity in monetary policy between the United States and Europe. While the Federal Reserve is in the early stages of tightening credit, the European Central Bank (ECB) only began quantitative easing in March – a process expected to last through late 2016. Cuts in the ECB’s refinancing rate have resulted in negative deposit rates throughout the eurozone, driving investors to the US credit markets and further distorting exchange rates.
Partially in response to the strong dollar, corporate earnings have come under pressure and the US manufacturing sector is struggling. Non-defense capital goods orders are well below last summer’s peak, and first-quarter GDP reflected a $110 billion gain in inventories, which could hamper economic growth in the second quarter.