Stockwatch: Should you 'sell in May' this year?

US financial issues are at a head now that the Trump Administration has tabled its tax bill, and equities having soared on expectations of a reduction in business tax to 15% and many other cuts.

A reality check lies ahead as to how the programme's circa $7.5 trillion (£5.8 trillion) cost can be met now a border adjustment tax is off the table - Trump is against spending cuts and Congress seems unlikely to approve a major rise in public debt. There's a precedent here, with Ronald Reagan's early-1980s tax-cutting agenda having bumped up the US budget deficit such that interest rates rose over 20% and the US stockmarket fell over 20%.

Obviously, history doesn't repeat itself, macro conditions are different, but mind the aspect of rhyme. Investors initially questioned Trump's maverick policies during the presidential election for introducing high risks, but once he was elected bulls seized hopes for stimulus.

It's currently unclear whether a round of supply-side measures can defy low levels of productivity, baked in due to ageing demographics. Also, the US Committee for a Responsible Federal Budget reckons 4.5% annual growth is needed to generate enough revenue to pay for Trump's tax proposals, against a sub-2% estimate recently.

Also worth recalling is how the US Congress turned against Reagan as soon as 1982 to recover about a third of lost tax revenues, rising to two-thirds by the time he left office. All this suggests US equities have priced in more hope than reality, having risen for 93 months (admittedly from 2008/09 crisis lows) versus an average period of 47 months for the market to rise, since 1900. So the near-term risks look high.

A correction may not be too damaging, longer-term. The optimistic case derives, ironically, from the economy's slowest growth rate since World War II, averaging 2.1% since Q2 2009 versus a long-term annualised average rate around 3%.

This may allow several more years of growth, assuming the catalysts for a cyclical downturn are insufficient, despite strong wage growth and the US economy approaching near-full employment. Q1 2017 companies' reporting has shown an overall robust pattern despite the weak 0.7% annualised GDP figure for this period. Share price reactions were mixed, however, some even falling in response to better-than-expected figures, as if buyer fatigue is creeping in and investors are wary to protect gains.

Another curiosity is the US GDP setback due to consumer spending nearly stalling in Q1, despite strong wage growth, versus surveys proclaiming high levels of business and consumer confidence. Mind, how it could be another sign of hopes divergent from reality.

Europe gains a boost for investor sentiment...

Hope looks more likely to flourish on the European Continent with centrist Emmanuel Macron riding high in opinion polls, having achieved 24.01% of votes cast in the first round of the French presidential election. Unless there are mass abstentions in the second voting round this Sunday 7 May, the 45.95% who voted for the other three, excluding Marine Le Pen, look more likely to switch to Macron.

International investors recognise Macron as a member of their elite clan, an ex-Rothschild employee keen on globalisation and strengthening the EU and its euro. He is much preferred to Le Pen's euro-scepticism that promises a French referendum on EU/euro membership. A Le Pen victory on Sunday would be far more an existential threat for the EU than Brexit, France being one of its chief heavyweights along with Germany, and its economy the third largest in Europe.

For France to rebel against the EU would be an earthquake for Brussels and the wider international system. In the off-chance of a Le Pen victory, the euro is liable to plummet, whereas a Macron presidency will reinforce the EU's confidence after Britain has disturbed it.

...while the UK situation looks edgy

The likelihood of Macron prevailing is a double-edged sword for Britain's EU negotiations, hence investor confidence here. Would it ease the EU leaders' insecurity? This may help explain their initially tough stance, closing ranks against Theresa May as she herself seeks a robust new majority government for Brexit negotiations. Potentially, Macron could settle tensions somewhat; his visit to 10 Downing Street last February was less acerbic than the alleged outcome of Jean-Claude Juncker's latest tete-a-tete with Theresa May.

British business is trying to put a brave face on it all, reasoning that an 8 June general election will push out the timeframe for the next to 2022, hence leeway to strike a trade deal beyond "official Brexit" by end-March 2019.

More crucially is how will consumers behave, having kept the UK economy buoyant since last June's referendum? Consumer credit has slowed this year after hitting an 11-year high in January (with an annualised growth rate of 10.8%), probably a good thing in terms of damage limitation come the next downturn, although the extent of finance packages supporting new car sales may already have pumped up a bubble.

Meanwhile, house prices slipped 0.4% in April after 0.3% in March, as rising inflation and low wage growth finally check prices boosted by George Osborne's mortgage subsidy programme. So the UK consumer economy shows signs of tiredness from excess creeping in. The general election debate will also expose a likelihood of medium-term tax rises in support of public spending on health and education, the recent raiding attempt on the self-employed and higher taxes on dividends being straws in the wind. The UK macro context, therefore, looks increasingly edgy, with much resting on consumer behaviour as Brexit realities unfold.

Corporate financial distress jumps 26%

Notably, the Begbies Traynor Red Flag Alert for April – a benchmark measure of UK companies' underlying health – cited levels of "significant" financial distress up 26% across key supply industries, with cost pressures expected to increase further after the latest increase in the National Living Wage.

Businesses within Britain's supply chain are feeling the pinch from uncertainty over future trade links with Europe together with rising costs. Inflation rose to 2.3% in March, its highest level since September 2013, with a 6.6% rise in transport costs over the last 12 months being the biggest contributor. Food suppliers, logistics firms and wholesalers have yet to fully pass this on to customers, but in due course the effect is liable to weaken areas exposed to discretionary spending such as retail, bars and restaurants, travel and leisure.

In some respects that's the opposite of "the great recession" years showing Brits unwilling to compromise on eating and drinking out: stocks such as Young & Co proved very reliable, rising strongly, albeit Young's exposed to affluent London and the South East. As yet, little of such "red flag" issues are proving enough to manifest profit warnings, but this needs watching as potential tell tales of a stiffer economic breeze.

Directors cashing in options/shares

Since emerging from closed periods on dealings ahead of prelim results, two directors of some strongly-performing stocks have opted to lock in gains. At AIM-listed online fashion retailer Boohoo.com, the chief financial officer exercised 43.5% of his share options at 50p and sold the 1,560,000 shares arising at 186.9p, netting over £2.9 million.

And at the FTSE 100-listed house-builder Taylor Wimpey, a non-executive director has sold 50,000 shares at 199.8p after a strong rally this year from around 150p. Admittedly, this constitutes only two material sales to note, out of the various companies I follow, involving only one member of respective boards of directors, so in no way can it be deemed a trend.

Indeed, overall it's encouraging how directors' general stance is "continue to hold". However, do keep an eye on the balance of director dealings in UK plc at this crux time for the economy and sentiment.

So, overall, equities face near-term potential disruption from the US and Brexit uncertainties. With Boohoo and Taylor Wimpey examples of hedging bets after strong runs, you might want to consider selectively for your own portfolio.