It is telling that, amid the doom and gloom on Wall Street, some investors have been looking for hope in an unusual place: stockmarket seasonality. At the start of April, as investors fretted about rising inflation, tightening monetary policy and the war in Ukraine, analysts at Bank of America predicted a “solid rally” in the stockmarket, driven in part by the tendency for share prices to outperform during the month of April. Alas, the rally did not materialise. Although the S&P 500 index of big American firms has generated a return of 1.41%, on average, in the month of April since 1928—the second-best month behind July—this year it tumbled by 8.8%, its worst showing since 1970. In the year to date, the benchmark index has fallen by 13.3%.

There are a few glimmers of hope, however. First, corporate profits remain healthy. S&P 500 companies are so far reporting an average growth of 6.6% in second-quarter earnings, according to FactSet, a data provider. Second, many firms are sitting on big cash piles that they can use to make their shares more attractive with dividends, share buybacks and acquisitions. Goldman Sachs, a bank, reckons that the value of buybacks among the S&P 500 will hit a record $1trn in 2022, up by 12% from 2021. Third, although consumer price inflation in America hit a 40-year high of 8.5% in March, many economists expect that to be the peak.

But investor sentiment remains bearish. Consider bond yields. The yield on a ten-year Treasury bond has jumped from 1.5% at the end of 2021 to 2.9%, partly in the expectation that the Fed will shrink its balance-sheet to fight high inflation. Rising yields tend to hurt the share prices of tech firms and growth stocks, for which profits are expected far in the future. High yields also put downward pressure on share prices as borrowing costs rise. They make dividend yields look less attractive and encourage investors to shift from riskier equities to safer assets such as government bonds. The difference between short-term interest rates and long-term ones has narrowed, which some interpret as a sign that a recession is just around the corner. Stock investors are growing more cautious, too, adding “defensive” shares, such as utilities or consumer staples, to their portfolios. The only sector that has outperformed in 2022, and spectacularly so, is energy. It has generated a return of 34%.

For those attempting to time the market, caution is advisable. The old adage “sell in May and go away” may be sensible advice for professional investors who need to pull themselves away from their trading desks. But in the past decade the strategy of divesting from the S&P 500 from May to October has never made money. ■

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