Investors aren’t yet backing out of stocks this spring.
Healthy skepticism hasn’t motivated much selling. An old belief has lingered on Wall Street for years – the belief that investors should get out of stocks in May and get back into stocks in October. But here we are in May – and while analysts are wondering how much more upward progress stocks can make, gains are still occurring. On May 9, the S&P 500 closed at 1,626.67 – up 1.82% so far for the month after going +1.81% for April.
A May retreat is hardly a given. You can readily find articles questioning the current rally, insisting a pullback is ahead. After all, didn’t stocks swoon in spring 2010 and spring 2011? Wasn’t last spring just an aberration?
The selloffs of spring 2010 and spring 2011 weren’t really prompted by seasonal behavior. You had the EU debt crisis, the twin calamities hitting Japan, and the debt ceiling fight (and the resulting U.S. credit rating downgrade) occurring. By contrast, across May-September 2012 the S&P 500 rose more than 4%.
Going back decades, the case for selling in May appears just as inconclusive. During 1965-1984, the S&P lost ground 15 times in May – but that 20-year stretch included a 16-year secular bear market. From 1985-1997, the S&P 500 never had a down May.
Conditions could support further gains. Earnings are sometimes called the mother’s milk of stocks, and we’ve seen about 5% Q1 earnings growth. The Fed is still purchasing $85 billion of Treasuries and mortgage-backed securities per month. Hiring has picked up. Consumer prices are barely rising. Money is regularly flowing into stock-based mutual funds this year for the first time since the market downturn of 2008.
Beyond these factors, there is still enough optimism on Wall Street to counter skepticism. If the current bull market is getting long in the tooth, few see a bear market quickly emerging.
As CNBC.com recently noted, Morgan Stanley chief investment strategist David Darst maintains an informal 6-point bear market “checklist” – and Darst sees none of the six bearish signals currently flashing (Fed tightening, recession looming, bond spreads widening, evident investor euphoria, stretched stock price valuations, retreat in small caps + transportation + bank stocks). While the Fed’s easing may be fueling the rally more than anything else, QE3 is still continuing undiminished.
The “sell in May” idea actually emerged in Great Britain, not America. Years ago, London brokers would go on holiday in May and head back to their desks in September, resulting in thin trading and subdued returns in the interim. Supposedly, this was how the “sell in May” pattern originated, and it may not even apply in Great Britain anymore: investors selling the Dow Jones STOXX 600 in May and buying back in for September would have lost money in three of the five years from 2008-12.
Your personal financial consultant – Monty