Nay Nay on Selling in May and Going Away
A discussion every year relates to the investment adage, “Sell in May and Go Away.” Historically, the five month period from May to November has been an underperforming time for markets. However last year, we elected to begin to put more into markets for many of our clients during this period reversing our conservative stance earlier in the year. It turns out that was a fortuitous move as the S&P 500 returned more than 10% during that time frame in 2013.1 We feel comfortable about the script being repeated in 2014. While we may not see the same level of returns, there are several reasons we believe the trend will continue in 2014. One reason is four times as many US companies are revising upwards 2014 earnings than revising downward.1 Secondly, LPL Financial’s Current Conditions Index hit a seven year high with increasing results in shipping traffic, business borrowing, and unemployment claims.2 Thirdly, Janet Yellen’s remarks before the Joint Economic Committee last week continued to be dovish while ECB President Draghi indicated that they would be willing to create more stimulus in the next month.2 Capital Expenditures (Capex) by corporations are showing signs of improving after adding nothing to GDP growth last year. Finally, economic activity is starting to pick up in emerging markets.1
When you peel the onion back on this old adage over the last 20 years, getting out of the market in May and returning at September’s end would have been a losing strategy. In 12 of the last 20 years, the S&P 500 was actually higher during that period. Dating back to 1994, studies of broader markets show that buying and holding during May to November saw the value would have grown 10 times original investment during those 20 years while exiting for that 5 months saw an 8.7% times growth.1
While we saw paltry GDP and earnings growth in the first quarter of 2014, I think the weather excuse was actual reality. With GDP coming in at .1% and with LPL Financial’s own predictions being 3% for the year, being out of the market for a quarter could be extremely detrimental to your overall returns for this year. The second quarter seems to be shaping up to be a good one with most expert prognostications for GDP being a 4% annualized rate for 2nd quarter.
Our faith is bound to be tested this year as we have already seen two sell-offs of at least 5% this year while having none such plunges last year. However with summer doldrums not occurring this year, we are looking at a great possible B side to the A side hit of 2013.
(1) “In the Markets: Should investors really ‘sell in May and go away’?” Michel Pireu. Business Day Live. 5/12/2014. http://www.bdlive.co.za/opinion/columnists/2014/05/12/in-the-markets-should-investors-really-sell-in-may-and-go-away (2) LPL Financial Daily Market Update 5/12/2014. LPL Financial Research