TLT - If History Is Any Guide - These Are Your Dos And Don'ts

2023-05-03 12:30:30 ET

Summary

• "Sell in May and Go Away"? Not so quickly, although the next few months, during a pre-election year, don't look too promising.
• Looking at the S&P 500 - neither valuation measures nor YTD performance + drawdown look tempting.
• While growth and large-cap stocks are the least attractive bonds and non-U.S. stocks are the most attractive asset classes.

"Sell in May and Go Away"? Not so quickly.

The good news: Over the past decade, the S&P 500 (SP500) closed higher in 90% of Mays.

The bad news: The single negative May happened in 2019 - a pre-election year just like the one we're currently at - and it was a rough one (-6%).

The neutral news: mid-year of a pre-election cycle usually treads water.

As of April 30, S&P 500 valuation measures suggest that while stocks aren't as expensive as they were in 2021 (or 1998-2000 for that matter) - this isn't a cheap market.

Each and every valuation measure is currently worse than its average over the past 25 years.

S&P 500 YTD return is already (about) in-line with the long-term average performance. However, the index's YTD drawdown is significantly smaller than the historical norm.

Yields, on the other hand, are looking attractive across the board.

With inflation expectations (as at May 1, 2023) pointing to a breakeven rate of 2.24%, real yields are quite high on both absolute and (surely) relative basis.

Furthermore, the iShares Core U.S. Aggregate Bond ETF ( AGG ) - a good indication for bonds - has already suffered (more than) the average drawdown this year.

Based on Z-scores over the past 25 years, the most attractive assets can be found on the left (U.S. debt and non-U.S. equity) and the least attractive assets can be found on the right (U.S. growth and large cap stocks).

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