Stocks, Bonds, Oil Confounded Experts in May
Dollar Rebounded, Yet Crude and Shares Rose as Well
By JAMES MACKINTOSH
Updated May 31, 2016 7:52 p.m. ET
Sell in May, they said. A strong dollar is bad for stocks and oil, they said. Everyone will get scared if China’s renminbi weakens again, they said. Avoid dangerous growth stocks, they said. Stick with safe, quality defensive shares with a yield, they said.
It didn’t turn out that way. As so often, markets confounded conventional wisdom last month. May brought a strong rebound in the dollar, yet shares and the oil price both rose, with the S&P 500 now needing less than 2% to make a new high. The renminbi had its third-worst month since the 1994 devaluation, but investors barely noticed. True, emerging-market shares got whacked in dollar terms, but stripping out the effects of the stronger buck, they only slightly underperformed the rest of the world.
Shares in companies offering growth were the place to be, just as last year, while cheaper “value” stocks again underperformed. Meanwhile, the shares into which investors switched earlier this year—companies such as Coca-Cola with a solid dividend and a product that sells even in a weak economy— struggled. The dash to dullness didn’t pay off.
The lessons are obvious, but repeated time and again. Fashionable stocks are overpriced stocks because fashions come and go. Equally, when everyone is concerned about something, it is probably already reflected in the price.
Fashions apply to the links between assets, too. A strong dollar must be bad for oil and U.S. shares, all else equal, because oil and American stocks are priced in dollars. It is also obvious that a weaker Chinese currency exports deflation to the rest of the world and risks a spiral of decline as Chinese investors switch into dollars to protect their savings.
But one of the basic laws of investment is that all else is never equal (one of the many reasons economics isn’t a science). If the dollar is strengthening because the U.S. economy is stronger, as the data suggest, then better economic news can offset the threat to profits of a rising greenback and higher interest rates.
The same goes for the renminbi. While the currency has fallen fast against the dollar, it rose against the euro and yen in May and was flat against a basket of China’s trading partners, the preferred measure of the People’s Bank of China. Last August and at the start of this year, the plunging renminbi was a China story; in May, it was about a stronger U.S., not a weaker China.
It is harder to construct a coherent account of the renewed weakness of energy shares even as oil prices jumped back above $50 a barrel for the first time since October.
None of the stories fit neatly with the behavior of U.S. Treasurys, either. The 10-year yield ended May at 1.85%, only fractionally higher than it started, while the two-year yield had its biggest monthly gain this year as traders bet on a rate increase in June or July. This pattern of short rates rising faster than long rates, known as a flattening yield curve, is usually a sign of concern about the economy.
May’s flattening is odd. The Atlanta Fed’s GDPNow tracking forecast is for robust growth of 2.9% in the second quarter, up from less than 2% at the end of April. There may be some concern that the Fed will make a mistake and hurt the economy by raising rates too fast. But such worries should push shares down and prompt buying of more defensive shares, which didn’t happen.
At times, markets seem to move just to spite those of us who painstakingly build explanations. Sometimes we should accept that market moves don’t fit calendar months especially well, with May featuring sharp turnarounds in several asset classes due to comments by Fed policy makers. Most of all, we should be humble about our ability to forecast what will happen to markets, or why, because the patterns change so often.
Write to James Mackintosh at James.Mackintosh@wsj.com
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