Will May be the most important month of 2020 for ASX shares?
May-be.
In all seriousness, the April we've just seen off has certainly been interesting. For one, it was the best month for ASX shares in over 30 years. During April, we saw the S&P/ASX 200 Index (ASX: XJO) gain 8.8%. If that was an annual result, rather than just 1 month, it would be a year of fairly solid returns. But in just 1 month, this result is truly extraordinary.
That said, the ASX 200 did come off quite a low base. March, in turn, was one of the worst months the ASX has ever seen, with over a 21% loss. And that's including the start of the recovery that the end of March ushered in. If you go from high to low, we actually saw a 28.8% decline within the month.
So why does May matter so much for ASX shares then?
Well, I think the dormant fight between the bulls and the bears we have seen over the last 2 months might come to a head in May. Since mid-March, the bulls have firmly been in control – which is why we've seen such a strong recovery since.
But there's growing evidence that this run might be running out of steam.
Over in the US, we already see danger signs with the 'Buffett indicator', which, as my Foolish colleague Brendon Lau points out today, is flashing red. The 'Buffett Indicator' is a metric that compares the value of the total GDP of the USA to the value of the stock market. Anything over 100% of GDP is usually taken as a warning of a possible overvaluation of the stock market. We are currently sitting at 179% of GDP for the US markets.
Back home, the ASX 200 is starting May today with a round of heavy selling. The ASX 200 is down 3.47% at the time of writing to 5,330 points – wiping out most of the week's gains so far.
After a record April, I think May might be the month that sets trends in 2020. We'll finally be able to get a deeper insight into how the coronavirus crisis is actually impacting ASX shares and the global markets. We'll be able to see more of the effects of the unprecedented monetary actions the US Federal Reserve and our own Reserve Bank of Australia have taken. And we'll be able to see the impact that lower earnings for many ASX shares will have on stock prices.
Foolish takeaway
In April, I think the markets were pricing in a 'best case scenario' for ASX shares. We might see this 'best case' turn into a 'real case' in May. Or we might see a continuation of the status quo. Either way, I think May is the moment of truth for ASX shares. Let's see how it goes!
