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Trade tariffs to weigh on markets more than seasonal pressures

This article is more than 12 months old

"Sell in May and go away" is a popular saying on Wall Street that arises from the S&P 500's historical underperformance from May through October.

Since many investors take time off during the summer, trading volume tends to ease and appetite for stocks lessens. That in turn can increase volatility, strategists said.

Accompanying this year's summer effect are an escalating trade war between the US and China, US-Iran tensions and Britain's uncertain exit from the European Union.

US President Donald Trump added to the tensions last Thursday by vowing to impose tariffs on all goods from Mexico, a threat that all but cements the first monthly loss for major US indexes this year and first May decline since 2012.

Stock rallied in the first four months of this year, surging 17.5 per cent, but the benchmark S&P index reversed course in May as hopes for a US-China trade deal faded.

In total, the S&P 500 fell 6.6 per cent in May, its biggest May decline since 2010.

"The fact that we had a big first four months and May has been weak tells us the market is behaving very close to seasonal historical patterns," said Mr Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac, a handbook for investors.

Mr Hirsch added that the S&P could rebound slightly in June, but he expects weakness from July through October.

This year, many investors said concerns about the US-China trade tariffs will weigh on stock markets far more than typical seasonal pressures.

"The path of least resistance is likely lower for a while because we think the trade war will go on for some time," said Mr Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas.

"But when you have an overwhelming macroeconomic influence like a trade war or a recession, that is going to overwhelm seasonal patterns."

After May's sell-off, investors are laser-focused on trade and clues on the Federal Reserve's interest rate policy, said Ms Kristina Hooper, chief global market strategist at Invesco. "Whether investors go away for the rest of the summer has a lot to do with two factors: trade news flow and what the Fed does."

Since the S&P rose so much in the first four months, Mr Ryan Detrick, senior market strategist at LPL Financial, is betting monthly declines will continue.

In the four years out of the last 50 that the S&P has dropped by more than 5 per cent in May, it also dropped that amount twice in June, he said.

"We are not out of the woods in terms of market weakness. Investors should still be on heightened alert for more of a pullback," said Mr Detrick.