Sell in May?

May is the time of year when history suggests moving out of stocks is a good idea, as the market has tended to flatten out between May and October.  This year, the best of the stock market rally indeed may be behind us -- but not necessarily if tax reform legislation looks like it will happen.  And, consolidation into the June 13-14 FOMC Meeting is a good possibility.  But, there is reason to think that the overall market will retain its positive tone into the summer.

Market Complacency
The apparent complacency in the stock market has masked large and offsetting gains and losses among specific companies and industries.  There has been significant adjustments in stock prices to fundamental changes at the industry level.  So, stock picking has become important.  Nevertheless, the complacency -- as seen in the absence of significant volatility  in overall measures -- has added to nervousness that the stock market will not be able to maintain its recent rally, particularly with the backdrop of questionable actions by Trump, the slow pace of legislation in Congress, and international hot spots such as North Korea.  From a contrarian's perspective, this background is best for a continuation of the rally.  A contrarian would worry if most observers don't see any problems.   

Washington 
Trump's contradictory comments and actions so far have been background noise from a market perspective.  While there is a sense among some commentators that Trump's actions and words will undermine US political institutions, this potential result is not close enough to happening to have a noticeable impact on the stock market now.  Moreover, although Trump is criticized for switching positions, in some cases, his switch had better implications for the economy than did his original position.  This was also the case with the courts' blocking of his anti-immigration order.

The House passage of an ObamaCare repeal has prompted much rancor on the part of Democrats and some support from Republicans.  In a sense, both sides won -- Democrats kept a new entitlement program while Republicans succeeded in paring it -- the latter unusual for an entitlement.  The legislation has little implication for the overall stock market, except to the extent that its continuing "life" in the Senate will hold back tax reform legislation.  Expectations of tax reform, though, remain a positive for stocks -- and the possibility of tax reform argues against any large-scale selling of securities.

The issue of Russian involvement in the election process or the Trump campaign is background noise, as  well, unless it leads to impeachment.  Ironically, the Russian actions have backfired, inasmuch as no US official will now push for any relaxation of the sanctions without significant concessions by Russia.

One accomplishment by the Trump administration that could have positive benefits for the economy and stock market is the trade agreement with China.  This agreement may not have received enough good press.   In addition, the pro-business bent of the administration leaves open the possibility of more M&A activity popping up.

Fed Rate Hike
Labor market data have been strong enough to justify a Fed rate hike in June.  This has not been the case with inflation data, since the Core CPI and Average Hourly Earnings have slowed on a y/y basis.  Fed officials, however, could maintain their view that inflation will speed up ahead as the labor market tightens.  So, at this point, the market pricing of an 80% chance of a June Fed rate hike seems reasonable.

If the Fed hikes in June, the stock market could take it in stride if it is viewed as confirmation that the economy is doing well.  Moreover, a June hike could ease some concern about future Fed tightening.  With some Fed officials comfortable with the idea of only two more hikes this year, a hike in June would suggest the possibility of skipping a hike at the September or December FOMC meeting -- one less stock market negative in the medium term.  (To be sure, skipping a hike in December could be offset by the Fed starting to sell off its holdings of government securities then.)  Skipping a hike in June because of currently low inflation would be very bullish for stocks, as it would signal that the Fed will be tolerant of strong economic growth for awhile. 

Real GDP Growth
Stocks would like to see evidence Real GDP growth will speed up noticeably from its weak 0.7% pace in Q117.  Right now, the Fed's models project 1.9% (NY) and 3.6% (Atlanta) for Q217.  In truth, not enough data are available as yet to have a reliable forecast for this quarter.  So, these model estimates can change.  But, the consensus view that GDP Growth will improve from Q117 should continue to support stocks.