FYI | May 01 2018
By Peter Switzer, Switzer Super Report
Will this be a sell in May and go away year?
I know I’m famous for being bullish but I have a problem with the history of the old adage “sell in May and go away”, as it pertains to stocks. The recent track record of May being a shocker for investors like us shows, for the past five years, it hasn’t really been a winning plan.
However, when you dig deeper, the longer story tells you that being cautious about buying stocks in May, and even up to October, may be an act of investing wisdom. And throw in a year when there’ll be a mid-term election in November, then there’s even more room for caution.
Now given how far the US stock market has progressed in recent years, there are a lot of cautious players out there, who think a big sell-off is on the cards. That said, I’ve shown previously that this 9-year bull market is not as long as two recent ones that ran for 12 years. And then there was one in the 1950s that stretched out for 15 years plus!
The outlook for now
Making matters scarier, we also have had to worry about bond market yields rising, and the Fed possibly raising interest rates too quickly. And then there’s the US President, who is worrying stock buyers with trade war talk, anti-North Korea jawboning and his big tax cuts and their impact in blowing out the US budget deficit.
And don’t forget there’s a concerted effort to have Donald impeached!
Before I deal with the May threat to stocks, let’s do a check on the threats to markets defying gravity for the rest of the year. Here goes:
- North Korea concerns — they’ve lightened off with the two Korean leaders — Kim and Moon — doing their get together over the weekend.
- Trade war talk cooled down a tad with China making some concessions on cars, IP and even opening up its financial sector to foreign bond products.
- The US economy came in with an economic growth number of 2.3%, which was much higher than the 2% tipped by economists.
- The latest guess of US company profits is a rise of 23%, which is the best figure for eight years!
- Since Larry Kudlow started advising the President, Donald has hosed down the tweets that have unsettled the markets.
- Finally, the Fed, which meets this week, hasn’t said anything to badly worry investors that it will be an aggressive raiser of rates. The new boss, Jerome Powell, seems to be a more measured monetary policy guy.
All this better news has served to push bond yields up recently but early in April, when Donald was spooking us and Kim Jong-un was doing his part as well, along with the Chinese on trade retaliation, the rush to the safe harbour of the bond market actually pushed yields down.
So, possibly, recent rises in yield, that have worried some, might be because the economic, company profit and geopolitical news has been so good that, along with the Fed’s [balance sheet unwinding] and the President’s tax cuts, this has helped to push yields up.
Yields up might be a positive not a negative sign for the future.
Sell in May?
And now to the history of ‘sell in May’.
As I’ve said, over the past five years, the old “sell in May come back on St. Legers Day” in mid-September, has not really been a winning plan. If, however, you go back in time, you’ll find it has a pretty good history of being a good piece of advice.
And that goes even more when you throw in a mid-term election year.
That said, May is actually the eighth-best month of the year in the USA, rising an average of 0.2%. “The past 67 years have seen 39 Mays where the benchmark index ends in positive territory for the month, and 28 when it declines.” (Marketwatch.com)
However, interestingly, May is the fifth-best for the Nasdaq and the current good reporting season for the hi-tech sector could be a plus for this index.
Have a look at the chart below, which paints the long-term picture of May and its negative effect on stocks.
Let me sum up what it shows:
- History tells us the months between May to October are the worst for US stocks.
- But over a five year period, the WSJ Data Group shows (looking at the two blue lines) that the dark blue line (May to October) actually beat the pale blue line (November to April). It looks like 5.5% versus 5.1%.
- For the longer period of 10 years, the score said selling May was smart, with a 7% versus 0.9% result proving the old adage spot on!
- For 20 years, the score was 5.2% versus 0.4%, supporting the sell option for May.
- Ditto for 50 years, with the score 1.3% versus 6.5%.
- And the all-time result explains why the little market rhyme has lasted, with the result being 5.1% versus 2%.
An outlier
The last five years look like an outlier, unless there has been a structural change to how stock market workers and investors actually work nowadays, and this is possible. It could be linked to the internet age, where big investors don’t really go on holidays. And then there’s computer trading, which now might mean that some contrarian-programmed computer buys when there is an illogical sell off, and maybe because the summer season in the northern hemisphere encourages even market players to go to the beach!
Throw into the mix that the mid-term elections happen in November and it adds to the riskiness of the May to October period.
Goldman Sachs recently warned that the campaigning for the election is “one reason to expect that current elevated levels of uncertainty will persist in coming months.”
And all this happens as US markets are not far away from the despised ‘death cross’. This is where the 200-day moving average crosses the 50-day moving average, with Charles Schwab research saying that even sideways trading could create the intersection of doom! When this happens on charts, traders see it as a bearish signal for stocks.
So what might again foil the “sell in May…” strategy? Well, if Donald ‘throws the switch to Vaudeville’ and tries his best to win friends and influence voters between now and November, then we just might see Wall Street find good reason to ignore history and keep buying.
From its peak, the S&P 500 is down from 2872 on 26 January to 2669 now. That’s a 7% fall, so there is scope for investors to use recent sell offs as a buying opportunity, but the May bogeyman isn’t easily ignored.
That said, if Donald can’t help himself and continues to spook markets in a mid-term election year, then history might have its way. To sell in May and go away until after the US elections might prove to be a wise play.
I’m hoping I’m wrong, as I do like the recent fall in the local dollar and Shane Oliver’s prediction that we’ll see a 70 US cents dollar ahead. This depreciation would be good for our economic growth and, in turn, should help share prices.
But there are a lot of ifs and buts in the rest of the year starting from May, which, of course, is tomorrow!
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.
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