So it seems that folks have been putting pencil to paper and have now discovered that there actually may be something to that old Wall Street Saw-"
Sell in May and Go Away". Barron's began the blogosphere's current infatuation with this phenomenon over the weekend
with a samely titled article.
Chart of the Day gave us this visual today. It shows the extreme performance differential between the November-April period {Blue Line} and May through October {Yellowish Line or whatever that color is!}. You can access that post
here. Our long time readers and our clients know we've taken market cyclicality into our investment work and we've devoted a great deal of time and energy to it over the years.
This is what we wrote back in August of 2012. I'm reprinting the whole thing below:
"We are particularly mindful of the impact that market seasonality can have this time of year. Basically there are seasonal variations or patterns that come into play in most years. The study of these bullish and bearish phases means that we accept that stocks at some point will experience a sell off between 8-20%. This is simply the normal course of how markets behave in most years as measured by money flows. While market declines can come at any time, statistically stocks are most prone to major sell offs in between the months of March and October.
One of the reasons we believe this pattern works is the philosophy behind how institutional money is invested. Institutional money is a generic term for organizations such as pension plans and large asset managers such as mutual funds. It is managed on a relative basis usually tied to a specific benchmark. By relative basis I mean as an example in a market that loses ten percent, institutional accounts that go down only 8% are said to have outperformed their peer group. That influences how their portfolios are set up. Institutions generally start a year with similar economic and valuation expectations for stocks.
Institutions have a very strong incentive to be heavily invested in the early months of a new year. They are afraid to fall too far behind their benchmarks. Their thinking is similar to that of a baseball manager at the beginning of a long season. The manager knows you don't win a pennant in April but you can lose one during that time. As the year progresses and in particular if stocks have advanced in the first few months, equities begin to look less attractive on year end expectations. Stocks will either need unexpected positive news {i.e. better than expected earnings news or higher economic forecasts for example} or prices will begin to stall out. If companies don't excessively move the needle higher on earnings and sales going forward than investors, especially those with a shorter-term horizon may begin to lock in their profits.
Stocks will fall of their own weight unless there are marginal new bidders for their shares. Summer is typically a down period for Wall Street as the news flow dries up {unless it’s bad news. It is amazing how many international crises begin in the late summer. Both World Wars, the Korean War, 9/11, the First Gulf War and the 2008-banking crisis are examples of this.} Summer is also when analysts begin to fine-tune their expectations for stock prices as clarity begins to enter the picture about year end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period of seasonal weakness. Once this discounting process is completed stocks will usually begin to rally sometime in autumn. The cynical amongst us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply Wall Street wants to get paid. So there is a strong incentive to boost share prices during the 4th quarter of the year.
Stocks have ample reason to trend listlessly and perhaps decline a bit from here into the fall. We are mindful of the problems that are out there and have our defensive strategies ready just in case they come to realization. But stocks are cheap on a valuation basis based on what we know today. While mindful of the fact that they could become cheaper still, the potential for earnings clarity as the year progresses, better than looked for economic growth and any resolution to the European situation have the potential to set stocks up for better returns later in the year."
Two last thoughts. That Barron's article I mentioned above lists five sectors via Fidelity select sector funds that do as well in summer as winter. These are in terms of sectors: consumer staples, leisure, multimedia, retailing and utilities. Folks, these are not the sectors from which bull markets are made. Also I'd note that markets this year are bucking their normal pattern which is to bolt out of the gate with a strong first quarter and then struggle to maintain those gains or give them all up plus more as the warmer months wear on. Here's an alternative scenario since everybody is focusing on the historically static performance in the warmer months. Since consensus seems to be that stocks flop a bit going forward and since everybody's focused on this, it could be argued that stocks will stage an unlooked for and unexpected rally. Probability suggests this isn't the most likely scenario. More importantly the Wall Street crowd is pretty resigned to a period now where we basically go nowhere for a bit. So let's remember that stocks will do what they have to do to prove the most amount of people wrong and markets often trade in the direction that causes the most pain. What if the direction of the most pain is to trade higher? Not saying this is going to happen but it's worth tucking away in the small corners of the brain. As always, we'll defer to our indicators.
*Long ETFs related to the S&P 500 in client and personal accounts although positions can chang at any time.
