3 Market Predictions For May

Summary

• April saw the worst monthly performance for the NASDAQ since November of 2008 when the country was in the depths of the financial crisis.
• The war in Ukraine entered its third month and inflation shows no signs of abating as 1st quarter GDP growth was negative.
• What will the month of May bring for investors? 3 bold predictions for the new month are highlighted in the paragraphs below.
• Looking for a portfolio of ideas like this one? Members of The Biotech Forum get exclusive access to our model portfolio. Learn More »

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You should open these doors with care and caution-but, first, you must know how to close them. And above all, you must know which doors should be left unopened...” ― Michael Bentine, Doors of the Mind

The month of April mercifully ended for investors on Friday. It was a month to remember for all the wrong reasons and ended in a rout on Friday as the NASDAQ fell 4% for the day. Amazon (AMZN) sold off nearly 16% on quarterly results and guidance, the online retailing behemoth's biggest daily decline since 2006. The NASDAQ dropped more than 13% during the month and is now down some 22% for 2022. To put it in perspective, this is a bigger monthly decline than what accompanied the moronic lockdowns back in March of 2020. One has to go back to the financial crisis to find a more dismal performance for the tech heavy index as it fell some 17% in November of 2008.

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It was a volatile month as all the FAANG stocks, with the exception of newly branded Meta Platforms (FB), posted disappointing first quarter results and/or forward guidance. One other exception to the decline in tech this month was Twitter (TWTR), which is in the process of being purchased by Elon Musk for a little less than $45 billion.

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Things were not much better for the S&P 500 as that index dropped 3.6% on Friday to end the month down 10%. It was the only the fourth month since 1973 when the S&P 500 was off more than 5% and U.S. Treasuries fell more than 2%. Gold was off 2% on the month to just above $1,911 an ounce, which was its worst monthly performance since last September. In short, there were few places to hide for investors in the month of April.

One key reason equities fell hard is the economy is decaying, both domestically and globally. The IMF recently revised its projection for global growth downwards to 3.6% for both 2022 and 2023 this week. This marks a steep drop from the 6.1% level of last year and from the 4.4% growth the institution had expected for 2022 at the start of January. Wednesday saw a negative initial first quarter GDP print. Albeit, given some of the adjustments contained within the report, the economy is not as bad as the 1.4% negative level posted and is likely to be revised somewhat in coming updates. The Atlanta Fed's GDPNow is currently projecting 1.9% GDP growth in the second quarter.

New COVID lockdowns in China can't be good for the global supply chain, which already has been bottlenecked for several quarters. Shanghai alone handles 20% of China's export traffic and has been in severe lockdown mode for weeks now.

The 10-year Treasury yield is fast approaching the 3% level, and the Federal Reserve is widely expected to hike rates another 50bps in May. This surge has dramatically impacted mortgage rates, with the average 30-year mortgage just north of 5% now.

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With the median selling price of a home up 16.7% over the past year, the ‘average’ home now comes with a monthly payment that is 35% higher than it was 12 months ago. Hardly a positive omen for the housing market which is a key economic driver.

So with a dismal April in the bag, what can investors look forward to in May?? Here are three things I will think will happen in the coming month (feel free to post your own predictions in the comments section).

Biotech Will Bottom:

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It has been a miserable 9-12 months for biotech investors as can be seen above. Rising interest rates have pushed 'high beta' sectors like biotech down across the board. The continued impacts from the pandemic have impeded sales traction for many small and midcap names. In addition, the FDA seems to have become overwhelmed with their COVID related work. Their decision-making process on many marketing applications from small to mid-cap firms has been anything but consistent even as everything from Big Pharma around COVID related vaccines and treatments seems to be rubber stamped.

Then there has been a dearth of M&A activity in the sector despite huge falls in the prices of myriad interesting small and midcap concerns. Small cap Zymeworks (ZYME) did get a bid last week. One would think M&A activity picks up in the coming quarters given the amount of bargains in the space and how flush with cash Big Pharma has become. To put in perspective, one week ago before last week's rout; there were approximately 250 small biotech names trading below the net cash on their balance sheets. In addition, some 600 biotech concerns were down 50% or more in the last 12 months, with nearly 350 down more than 70%. Given this, it is hard to see how sentiment can get any more negative on the sector.

Ukraine Will Continue To Be Full Of Potential Land Mines:

The war in Ukraine just entered its third month. The cost in lives and destruction has been enormous on both sides.

Despite this, no party seems much interested in pursuing peace at this point. The current administration seems determined to fight this war to the last Ukrainian to 'weaken' Russia as our Secretary of Defense recently stated. So far, they have requested some $50 billion in aid for Ukraine as well as an open ended 'lend-lease' program, mostly for military efforts. To put this in perspective, Ukraine's annual budget for its military before the invasion was $6 billion.

Please note, none of this commentary excuses any of Putin's absolute barbarity which is beyond the pale. However, from a realpolitik view, we are treading very dangerous waters. It is hard to see how Europe avoids a recession at this point, particularly if energy supplies are interrupted. So far, EU sanctions have had little to no impact on Russia. The country took in 40 billion euros from Europe over the past two months for oil, natural gas and coal thanks to much higher prices for commodities. Putting that in perspective, Russia garnered 141 billion euros for these exports to Europe in 2020.

In addition, we have not started to see the main impacts of the war on the global food chain as this part of the world exports huge amounts of fertilizer, wheat, corn, and nutrients. Tens of millions in Asia and Africa will face substantial food insecurity as a result, while in the West the prices of staples will continue to rise at a sharp clip.

The potential for an event in Ukraine to cause a significant spike in market volatility in May seems high. This could come from increasing worries that Russia might resort to chemical or low yield nuclear weapons or an unintended escalation (Ex: missile strikes on a convoy of arms shipments just outside Ukrainian borders). The most probable event is Europe moving to much more robust energy sanctions on Russia, which seems increasingly likely. This would cause a huge spike in oil prices and almost instantly put Europe in economic contraction, and could possibly do the same in the U.S. where gas prices are near all-time highs.

The Dollar Has Peaked:

One of the more perplexing things to me in the market is that the greenback is so strong given the myriad challenges the U.S. faces on the domestic and foreign policy fronts. The Dollar Index hit a 20-Year high this week as the Yen fell to its lowest levels since 2002 against the dollar while the Euro hit a five-year low on growth concerns. Talk about being the best house in a bad neighborhood.

I don't think this is sustainable for myriad reasons including reversion to the mean. In addition, I think there is at least a 50/50 chance the country is in recession in the next 12 months. I also think the Fed 'blinks' by the end of summer thanks to significant disruptions in the economy and the markets. Monetary tightening has been a driver of recent dollar strength.

Finally, the sanctions against Russia including the freezing of hundreds of billions worth of assets may have been well-intentioned. However, this poorly thought out series of directives should have the unintended impact of undermining the dollar as the world's reserve currency. China was already making inroads on this front prior to the invasion and asset seizures will only accelerate these efforts. Over time, this could weaken the dollar considerably. The dollar's share of foreign exchange reserves had already fallen from 71% in 2000 to 59% in the third quarter of 2021.

A weaker dollar will be a further tailwind for commodity prices (since most are priced in dollars) as well as continued inflationary pressures.

Given this outlook, I remain cautious on the overall market despite the large sell-off in equities in 2022. My cash allocation remains in the 25% to 30% range. I am acting upon almost all new opportunities via covered call orders which provide additional downside protection.

There will be a time to buy this dip in a major way at some point in 2022. However, I don't think we are close to 'capitulation' at this point in time, outside certain sectors like biotech, and therefore I am remaining patient.

Your inability to see the wisdom in someone else is not a reflection on their lack of perspicacity, it is a reflection on yours.”― Ilyas Kassam

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Analyst’s Disclosure: I/we have a beneficial long position in the shares of FB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.