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When in May, don’t sell the U.S.A.

Investors’ favourite seasonal adage is in need of an update after the S&P 500 Index’s 2.2-per-cent monthly gain, its best showing in May since 2009. This advance propelled a ratio of the benchmark U.S. stock gauge to the MSCI World Index to a record high.

“For now the ‘long U.S.’ trade is winning,” analysts at Bespoke Investment Group wrote in a note Friday. “After losing ground to the rest of the world for most of 2017, we’ve seen a resurgence for U.S. equities in recent months.”

The Russell 2000 Index, composed of more domestically oriented small-cap stocks, hit an intraday record high on Monday on the heels of three straight months of besting the S&P 500 Index, the longest such run since September 2016.

Revisions to analysts’ estimates for publicly traded American firms “suggest unusually robust strength in U.S. fundamentals,” Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch, said in a note on Monday. “Another sign of U.S. domestic strength outpacing that of the rest of the world: The three-month earnings revision ratio expanded for stocks with pure domestic sales last month (from 1.26 to 1.38), but moderated for multinationals (from 1.99 to 1.72).”

The magnitude of the upward revisions bodes well for U.S. equities in the near term, she wrote.

The Russell 2000’s time in the sun has been in part catalyzed by the revitalized U.S. dollar, which just capped its best two-month stretch since December 2016. Companies in this index tend to generate less foreign revenue than their large-cap, multinational counterparts and are also less exposed to shifts in trade policy or fluctuations in activity overseas. The greenback has benefited from a U.S. economy that continues to exceed expectations -- especially relative to its peers in Europe -- as well as risk-off moves spurred by concern over Italian politics and turmoil in select emerging-market economies.

Unlike U.S. stocks and the dollar, however, Treasuries might be tired of winning, cautioned Peter Tchir, head of macro strategy at Academy Securities Inc.

“Have we seen an inflection point where tax cuts and spending are about to impact the data positively?” he wrote, referencing the stellar non-farm payrolls report released Friday.

Fixed-income traders dealt with multiple cases of whiplash last week as Italy’s evolving political drama spurred the biggest one-day jump in Treasury volatility since 2016. Strong U.S. data, coupled with an exodus of bets against Treasuries as investors temporarily flocked to haven assets, may set the stage for a renewed rise in rates.

“A lot of U.S. Treasury shorts got stopped out and many volatility sellers in the Treasury market were forced to cover, leaving the market exposed to a move for higher yields,” he said.

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