As we head into the May trading period, our thoughts go to the adage “Sell in May, Go Away.” Looking at S&P 500 returns during the month of May since 1994, stocks have gained 73% of the time with an average return of 0.76% for the one-month return. The average annual S&P return over the period is 8.27% and therefore selling at the end of April and rebuying June 1st each year would have reduced the average investment return to 7.51% over the period. Unfortunately, often when investors sell their portfolios, they do not return to the market for many months. If the investor limited participation in the market, investing in January and exiting the markets on the last day of April, the average annual
return earned would be 2.83% from 1994 to the present. As demonstrated, remaining invested overtime is the most profitable strategy, including in negative return environments.

Factors to consider in 2023:
Corporate Earnings – As of April 14, 2023, 90% of those S&P 500 companies who had reported earnings were above expectations while 10% reported earnings that missed expectations. This represented a bullish start to the earnings season.

Financial Sector – Janet Yellen and various Federal Reserve Governors have given multiple speeches recently indicating that the financial sector is secure. Large financial institutions have reported, and earnings are positive with several cases where deposits rose (JPMorgan Chase for example). First Republic Bank certainly remains a source of concern and there are many smaller institutions where Hemispheres’ investment outlook is not favorable. We should point out that large banks continue to have a reasonable margin of safety above minimum reserve levels. After the Silicon Bank issue in March the Federal Reserve opened its borrowing window to provide banks with liquidity and provided a reserve backstop. Smaller banks will have a difficult time maintaining sufficient profitability to offer competitive money market
returns and therefore deposit outflows are likely to continue for some time. If this scenario plays out as expected, industry consolidation is expected as an initial remedy with further government lending required as a backstop to maintain reserve adequacy. Other government measures will include substantial tightening in regulation, particularly for smaller banks.
In the case of First Republic Bank (FRB), which had over a $100 billion drop in deposits during the first quarter, there are
reports that the government will not intervene to rescue the entity. FRB was provided with intermediation in March when 11 large financial institutions deposited $30 billion with the bank. Most recently, FRB’s advisors are asking some of the larger banks to purchase bonds from FRB at above-market rates for a total loss of “a few” billion dollars. Advisors argue that a bank failure at FRB would cost these banks approximately $30 billion in increased FDIC insurance fees. If this effort is successful, other buyers are being lined up to purchase new stock. FRB stock has declined 95% thus far in 2023.
Federal Reserve Interest Rates – Given the difficulties and headline risk associated with FRB, market participants have reduced their probability estimates of another interest rate hike during the Federal Reserve’s next meeting (first week in May) to 75% from 89% previously. Federal Reserve governors in speeches earlier in the month, however, have been “hawkish” citing continued need to increase rates to combat inflation. With the FRB crisis, it is possible that this rate increase will be put on hold in May, however there is little doubt that rates will be raised in June if not in May.
Portfolio Implications – Hemispheres is a value manager investing in industry leading entities with strong fundamentals. Fundamental factors include profitability, positive cash flow, and a well-managed capital structure that provides for a clear ability to service debt and return capital to investors. Portfolios focused on buying solid entities trading at discounted levels reduces risk in portfolios, especially over the long-term.

Please feel free to contact us with questions.

Hemispheres Investment Management
Rebecca K Holden, CFA
Director of Domestic Research

Michael A. Hart, CFA



April 28, 2023