After the drubbing stock prices have taken in the last few months, many investors are looking to reduce their exposures. Based on a number of macroeconomic factors, however, I think we may be in for a bit of a rally in May.
The biggest factor that should push up stocks this month is lower energy prices. Crude oil futures dropped about 18% in April, and according to a recent study performed at the Rotterdam School of Management, lower oil prices in one month are frequently followed by higher stock prices in the next month. The article, titled Striking Oil: Another Puzzle, doesn’t have a perfect track record in calling every up move in equities, but when one considers how much attention crude prices have been receiving, I believe a bit of a relief rally should be in the works.
The other factor that encourages me is the recent action in the bond market. After falling precipitously in March, bonds seem to have found their footing. When stocks and bonds fall together, there is no way for traditional investors to make money, which puts considerable pressure on them to pare back their portfolios. With bonds back on track, I suspect stocks will rise a bit as well.