This week we flipped the calendar over to May. For many of us, it means warmer weather, graduations and an ongoing impatience for summer. For market watchers, it will usher in the old saying, “Sell in May and Go Away.”
In the last few weeks, this adage (yep, it’s been around for decades) has again come to the forefront of investing news. Sure this rhyme may have a good ring to it but what does it mean? Should you go away?
The “Sell in May” rule has come to suggest that investors should get out of stocks in May and then return to purchase them at the end of October. This comes as the cited time frame historically has stocks underperforming during this period as compared to the November to April span.
By separating the year into these two halves (November to April has been referred to as the “good or winter half” while May to October is the “summer or bad half”), the S&P 500’s performance is disparate.
If we rewind over the last 50 years, this benchmark index has increased 1.3 percent on average for the summer months but 7.1 percent for the other six-month period, according to Jeff Hirsch, editor of the Stock Trader’s Almanac, via CNN.
Why is this so? There are a few thoughts besides many Wall Street executives taking their summer holidays.
Mark Dow, an investor, an author at the Behavioral Macro blog, said to CNBC, “It’s not true for any fundamental reason, but it maps to our psychology and how risk budgets are set. At the beginning of the year, people tend to be more bullish just because you’re putting money to work. Asset allocators are giving money to managers, and speculative juices naturally flow. And if the macro backdrop is decent, we continue to ramp it up. But at some point, we take it too far, and all that enthusiasm unwinds and reverses. And that often happens to be held between May and July.”
We know nothing is etched in stone. From 1979 to 2013, the S&P 500 increased 57% of the time for the months of May through August after the year began with an increase, noted James Hosker, a director in equity strategies at Société Générale. But stranger things can happen.
If we take a look at 2011 as the U.S. debt ceiling and the European Union debt crisis dominated headlines, it led to an 8.1% decline in the S&P 500 in the “good months.” Then in 2013, the index jumped 10 percent during the “bad” summer months.
For this year, the economy is starting shed its brutal winter layer, leading many to believe an interesting summer may be coming.
What about 2014?
With the Ukraine crisis still affecting the financial landscape–and no short-term end in sight–some financial experts see this risk as well as upcoming earnings as ways to keep investors active in the market this summer.
Citigroup chief U.S. equity strategist Tobias Levkovich, recently said via CNBC, “We’ve argued that the first half is going to be volatile…but we expect we’ll do better in the second half as earnings growth improves.”
While Levkovich expects first-quarter earnings growth to be at 3.8 percent, he estimates the increase continuing with second-quarter growth at 7.4 percent. Then there’s a 6.7 percent increase for the third quarter and 8.7 percent for the final one.
On the other hand, one market professional sees this upcoming period as one that will be “worse than usual” thanks to the fact it’s a year with midterm elections. History doesn’t favor these.
Sam Stovall, chief equity strategist at S&P Capital IQ, recently wrote in a report that since 1945, the worst six-month period for any four-year presidential term has occurred in the second and third quarters of a mid-term election year.
Many also see some potential political stagnation and mudslinging coming our way.
To deal with this, you may want to think about taking a defensive stance during the upcoming period noted by Hirsch and when it comes to an end, be ready to come off the sidelines.
And as we all know, while Wall Street may take a summer vacation, it’s always important to keep your eyes on the markets and your investments at all times.