The market adage "sell in May and go away" failed to apply again this year as the stock market continues to hit record highs. The investment saying that investors should take their profits ahead of warmer weather and return, presumably when markets are lower in the fall, has not worked the last couple of years.
The S&P 500 Index (SPX) gained 2% in May and now hovers near an all-time high position. The benchmark index is up 4.5% for the year. The bond market has also been rallying this month as well, with bond yields for 10-year Treasuries hovering at 2.5%.
Investors continue to be concerned about the pace of economic growth which had been expected to be more robust. Investors caution and growing expectations that Fed policy will continue to be accommodative has helped drive demand for Treasury bonds and kept interest rates low.
The other factor driving bond market gains is that many investors were caught on the wrong side of the bond trade, expecting rates to rise. They are now forced to buy into the market to cover these positions. The end result is that both the equity and bond markets climbed in May on very little economic news.
Investors also appear to be favoring safety and low valuation over risk and momentum these days. The S&P 400 MidCap Index (MID) advanced 1.7% in May, and is now up 2.9% for the year. Small-cap stocks by contrast continue to be down for the year, down 2.8%. So in terms of opportunities in the US market, large and mid cap names continue to be favored.
Specific to the midcap segment, energy names have been leading the way, along with transportation and industrials. EQM Capital's Mid Cap Quant portfolio is up 6.0% since inception, but continues to trail the benchmark year-to-date.
Our quantitative models tend to underperform during inflection points in the market as our low turnover portfolios take time to migrate from growth to value. But we are seeing the portfolio reorient itself to the current market environment. May returns were in-line with the S&P 400, up 1.0% for the month net of fees.
One of the positive performers for the month included Philips 66 Partners (NYSE: PSXP). The company recently increased its dividend and benefiting from the domestic oil boom in the U.S. Broadridge Financial Solutions (NYSE: BR) also had a good month after reporting higher than expected earnings on May 9.
Broadridge, a provider of technology solutions to the financial services industry, benefited from new business wins and higher equity trading volumes.
One of the weaker names in the portfolio in May was Ubiquiti Networks (UBNT), which traded down despite beating quarterly earnings estimates. The stock rebounded slightly by month end on the news of a $75 million share repurchase and several analyst upgrades. Ubiquiti provides networking products and solutions for service providers and enterprises. We continue to hold this position.
The portfolio is favoring valuation and strong fundamentals in the current market environment as value continues to outpace growth by a good margin.
Sectors being favored by the strategy on a bottom-up stock selection basis include: energy and consumer staples.
DISCLAIMER: The investments discussed are held in client accounts as of May 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
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