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Sell In May?

FYI | Mar 28 2017

By Peter Switzer, Switzer Super Report

Has Trump failure put "Sell in May, or before" back in play?

“Sell in May and go away, come back on St. Leger’s Day”. This is an old stock market saying that has a pretty good strike rate, though there are numerous times when it doesn’t work out.

That said, after the Trump trade has delivered a double-digit drive higher for the stock market and there has been little evidence that those big market influencers, who direct stock market indexes (such as the S&P 500 in the USA and our own S&P/ASX 200) have had any appetite to sell off stocks, the question is: will Trump soon lose his market mojo with May looming?

For the record, in a 2012 research paper, University of Miami associate professor Michael Fuerst (along with his workmates, Sandro Andrade and Vidhi Chhaochharia), found stock returns were 10% higher in the November-to-April half of the year than in the May-to-October period.

And their work was not only good for the US market but 36 others, so the difference in returns makes any sensible person wary of the May to September timeframe. Have a look at their chart:
 

“This out-of-sample persistence indicates that the effect is enduring and not a statistical fluke,” the authors conclude. (CNBC)

OK, given this, and given the fact that the Trump effect plus an improving economic outlook from the USA to China to Japan to Australia and even Europe, this May could be really challenging. Why?

Well, Donald got trumped by his own party (the House Freedom Caucus to be precise) on his health care bill and now he is turning his attention to his tax reform promise.

Clearly, if he gets rolled on this important market-loving commitment, Wall Street could give up a hell of a lot of its rally since November 8 last year!

I have to say I was surprised to see the [Friday] reaction of US stock markets to the health care bill’s failure. The Dow was off only 58 points, the S&P 500 was down 1.98 points but the Nasdaq was actually up 11 points!

Arguably, market smarties did not have time to react as the vote’s failure was close to the ringing of the bell at the New York Stock Exchange (NYSE) but it could also be that the market took the bait of President Trump. The author of the book The Art of the Deal virtually told his Republican ‘enemies’ that he would revisit the health care bill later and that they can live with Obamacare, while he gets to work on his plan to cut taxes.

Negotiators who show they can walk away from a deal have a lot more leverage than those who want to stay and talk!

This switch to the tax bill is a gamble but so far it has paid off for Trump. This week will be telling and I’m not sure we’re out of the woods with this potential negative reaction to his loss in Congress on Friday.

I’m not alone in being a little bit nervous about how the market might react this week, especially with May looming.

One veteran member of the House told CNBC that “if this [the health bill] goes down, we could take a 1,000-point market hit,” but that looks a little excessive. UBS’s Art Cashin, whom I’ve interviewed both times when I’ve taken my TV show to the NYSE, saw the vote’s potential drama this way: “If they decide to postpone and not vote either tonight or whatever, [there’ll] be a mild sell off because people say the votes still remain questionable. If they vote and have it voted down, there will be a more substantial sell off.”

Art is often on the money, so I’m not expecting a big sell-off but you can never be too cocky around this time of the year. Of course, if he has tax trouble in Congress then my guarded optimism will be tested.

This healthcare vote is important because the overall attitude to stocks is positive, as the following from Lisa Kopp, head of traditional investments at US Bank Wealth Management shows: “The economic data seems to be positive; that’s why we are still positive on stocks for the year.”

One reason the market could go soft on Donald’s first up failure is because a lot of experts always saw the healthcare changes as a challenge.

Marcel von Pfyffer of hedge fund, Arminius Capital, thinks informed US investors always knew that the health reforms of changing Obamacare were always going to be harder than the tax reform measures.

That said, we had a Trump dump last week, where our market fell 1.5% and that was health bill concerns related.

We’ll we be looking towards Wall Street for the lead we need. If the market gets spooked by worries that Trump’s other promises won’t be supported by Congress, then the Trump rally could unwind.

Jeffrey Saut of finance group, Raymond James, thinks a pullback is on the cards with Trump doubts likely to create stocks sellers out of one-time buyers but like me, however, he remains bullish overall on stocks.

“Secular bull markets tend to last 14, 15, 16 years,” he told CNBC. “We’re eight years into this one. It suggests there are years left to run.”

That’s why I think my ‘buy the dips’ remains a pretty good strategy. The other might be sell in May but the timing of this sort of thing is never easy. And what if President Trump pulls off his tax plan?

There could easily be another big leg up!

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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