May 2026 Update

May, 2026

Sell in May and Go Away?

Equity markets rose strongly in US$ terms in April despite an absence of agreement in Islamabad between Iran and the USA. The A$ strengthened (finally) and so unhedged returns were 'only' just over +4% in A$ for the global strategies.

In the last 12 months the indices biased to Value have beaten those biased to Growth by about 5%.

The US equity market is up close to 13% from its end-March low, with gains concentrated almost entirely in two sectors: Technology and Energy. That narrow leadership is itself a signal. Higher first round effects on inflation from oil price increases will erode household spending power; slower consumption growth, layered onto the prospect of structurally higher long-term interest rates, might weigh on the broader market.

Stocks that were helpful in April included Qualcomm up 40+%, Alphabet + 39%, Misumi Group + 37% and Jabil + 36%. More stocks fell than rose which speaks to the narrowness and risk of the market.

Macro comments - unusually important

The macro backdrop (which we seldom use to drive capital allocation) is 'challenging' and indulge us as we occasionally like to pontificate a little.

Core inflation, at 2.6%, remains above the FOMC's target (inflation almost everywhere is above the randomly chosen 2% p.a. figure that is deemed 'sensible'). The Hormuz (partial?) closure, which has restricted approximately one-fifth of global oil trade, is a supply shock, not a demand-driven price event. Thus, even assuming we get rate cuts in the USA and Europe, these do not reopen shipping lanes, restore refinery throughput, or repair the insurance markets that are currently pricing existential risk into every tanker in the region. A complete inflation picture will take four to six months to emerge as supply chain pass-through works its way into the data.

The FOMC, with the 1970s firmly in mind, should not be rushed. As a reminder, those countries which accommodated the oil price shocks in the 1970s by loosening monetary policy (UK and USA) saw the worst inflation experience and those that didn't (Japan and Germany) contained inflation which set their economies up for years of competitive gains.

The Bank of England is arguably the most precariously positioned: the UK has European-scale energy exposure, a weaker currency buffer, massive increases in taxation and regulation which increase costs, and four rate cuts already delivered in 2025. The BoE now faces the prospect of holding - or reversing - rates precisely when the domestic economy needs relief most. That contradiction will define the May 9th MPC meeting as will local elections before then. As an exercise in further crushing an economy the UK policy makers must be awarded 5 stars.

Kevin Warsh: Confirmation Clears Its Biggest Hurdle: but what changes to the paradigm are afoot?

The path to confirmation as the Fed Chairman for Kevin Warsh, Trump's nominee to replace Jerome Powell, has cleared a material obstacle. The DOJ dropped its criminal probe against Powell - the sole condition Senator Thom Tillis had placed on releasing his hold on Warsh's nomination. The White House is confident that confirmation will be completed before Powell's term expires in May.

The 21st of April hearing delivered two market-relevant headlines-on the Fed's independence and framework.

On the institution's independence, Warsh stated unequivocally that no commitment on rates had been sought or given by the White House. Echoes of Mandy Rice Davies?

On framework, Warsh called explicitly for a "regime change in the conduct of policy" - a clear signal that the Fed's inflation mandate will be reset, in both substance and communication. Hints have been given to the effect that the Treasury and the Fed will work more closely; essentially causing some to fear a reversal of the Fed Independence. It is not worth exploring this here but there IS a valid question to ask of fiscal and monetary policy makers, which is "would explicit fiscal and monetary policy coordination be more effective in driving non-inflationary growth through productivity gains?" Central bank independence adopted by almost every western country has hardly produced stable non-inflationary growth with minimal financial shocks/events. Watch this space but there may be a seismic shift occurring here. Note how in Australia the RBA and Treasurer are engaging in some sort of push me pull you game. If Chalmers were honest, he would agree that monetary policy should be tightened given the large increase in government spending on essentially unproductive assets; energy subsidies to prevent price rises don't reduce inflation they remove the price signal that something is wrong with policy. As always maybe the USA will move first? It'll be fun to read the hysteria.

Onto the oil market

The United Arab Emirates was involved in two, almost certainly connected, news events at the end of April, both of which we think have longer term implications beyond the short-term headlines.

The first was the request, granted by the US, for the UAE to access to US$ swap lines, in effect asking for access to US $ to meet its short-term liabilities, its cash flows having obviously been heavily impaired by its inability to export since the Straits were closed. These swap lines were promoted by the Treasury and not the Fed - so are implications for Warsh's idea of coordination at play? The USA needs a steady flow of investment from recycled petro dollars and can now secure these independently of any Fed decision. These Treasury lines also provide liquidity to Gulf States which would otherwise be thinking about offloading some illiquid US$ assets (private credit, real estate) into a fragile market, to cover Hormuz induced financial stress.

The second was the announcement that the UAE was going to leave OPEC, with effect from May 1st. While a surprise, this is something that has been brewing for quite some time, as the UAE has been fighting against the OPEC cap on its production at a little over 3m bpd, whereas it has the ability - and the ambition - to sell almost 5m bpd. Ultimately the fracturing of OPEC means more supply and lower oil prices. Outside of the big oil and gas interests, this is certainly what the US wants as well, so we would not be surprised if the two announcements were a form of 'deal'.

There was a third, largely overlooked, announcement, which is for a long-term lease deal with Jordan for the Port of Aqaba on the Red Sea. This is from the UAE perspective about securing supply lines for imports from Europe that reduce exposure to the Straits in the other direction.

Surprisingly despite the chaos caused by the 2021 Suez Canal blockage by Ever Given a container ship, there has been little global trade supply chain contingency investment. In April the Malacca Straits were posited as a new supply choke point which the USA and Singapore were quick to refute. We'd hope that overland energy pipelines and new canals are on the agenda otherwise we're all going to be periodically held to ransom. Our expectation remains that private sector capital investment will increase further from here. Our hope is that the private sector is mobilised to do it. As an example of government efficiency (sic) the California High Speed Railway Project is now estimated to cost $120+ billion from an original estimate of $33 billion. Not one mile of track has been yet laid.

The View from Here

The hope for eventual normalisation is not irrational - it is the desired long-run positioning in most environments. What makes relying on hope over experience dangerously prone to error is the timing. The data that will define this cycle - Q2 CPI readings, shipping insurance trends, tanker utilisation through alternative routes, supply chain pass-through into core goods - does not yet exist but is likely to deteriorate. Central banks know this but may cut anyway which we think ceteris paribus makes inflation worse. Investors who have already priced in rate cuts should ask themselves whether they are discounting a resolution that is months, not weeks, away. Note how much of the valuation of the equity markets relies on the long term 'residual' value as opposed to the here and now dividend stream. Some equities are now an unprecedently very long duration asset. As we wrote in March, companies will struggle to keep the trifecta of buy backs, capital investment and employment going. Our guess is that headcounts are cut before capital expenditures, and executive buy backs are sanctified (morally wrong but that's the Zeitgeist?). Way back we noted that head count reductions tend to lead to share price underperformance as a quant factor. Just saying.

Patience is not pessimism. In this market, it is the only defensible analytical position.

Delft Partners May 2026