Tuesday, May 8, 2012

Stay in May and Go Away?

Wall Street stock strategists like to come up with catchy phrases to describe their current investment strategy.

Phrases like "don't fight the tape" (i.e. follow the current market trends) or "no one every went broke taking profits" have long been a staple of presentations that I have attended over the years.

More recently, however, I have heard the axiom "Sell in May and Go Away" repeated on several occasions.

Historical data going back to 1945 indicates a remarkable tendency for markets to do very well in the first part of the year, only to give back most if not all of the gains during the summer months.

Often the market rallies in the final quarter of the year, giving the appearance that buy-and-hold is usually the best approach, yet the data would suggest simply selling all of your stocks in the spring, and reinvesting at the end of the third quarter, would be a better approach.

In 2010 and 2011 the S & P 500 saw solid gains in the first four months of the year followed by fairly significant "corrections" during the summer months.  Fortunately, both years ended with strong rallies, but the pattern of the past couple of years has lead many investors to wonder if they should be selling stocks now.

Well, perhaps, but I wanted to offer a couple of thoughts that might make 2012 different.

First, Merrill Lynch research analyst Stephen Suttmeier looked at data going back to 1928 and found the following:

The Presidential Election year is usually not a "sell in May and go away year". During a Presidential Election year May through October generally has had an above average return, while November through April has had a below average return....

Using average monthly data, the weakest period of an Election year has been April and May, and this is followed by the strongest three month period of an Election year, June, July and August.  This suggests a potential summer rally in 2012.

Then there was piece written by Paul Lim in last Sunday's New York Times about the seasonal effect on stock market returns.

In 2011, global fears over inflation, especially surrounding elevated food costs in the emerging markets, led central banks around the world to raise interest rates. This year, policy makers in many of those same places — including China and India, and even Europe, at the European Central Bank — have been lowering rates to jump-start growth. Just last week, the Reserve Bank of Australia slashed rates by half a percentage point, citing a weak economy and mild inflationary pressures...

 Meanwhile, the corporate earnings picture looks much brighter than it did as recently as a month ago. In April, Wall Street analysts were forecasting flat profit growth of less than 1 percent for companies in the S.& P. 500 in the first quarter. But with around 85percent of those companies having reported their results, consensus forecasts for earnings growth have been ratcheted up to 7.2 percent.


In other words, in this year at least, there is probably sufficient reason to just sit tight.