Does the old stock market clichÃ© have any credibility in 2012?
An old stock market dictum says that spring is for profit-taking, or at least a time to reduce your exposure to equities. In the classic market psychology, you â€œsell in May and go awayâ€ with the belief that stock prices will plateau or retreat in spring and summer, and then you return to stocks in the fall, taking advantage of bargains and factors that will encourage a hot fourth quarter.
In the last several years, we have seen all kinds of stock market behavior, some of it extraordinary. So is there any credence to this approach now?
The argument for â€œgoing awayâ€. Over the last 12 months, investors who held to this belief made out pretty well. From May 1-November 1, 2011, the Dow lost 6.7%. From November 2011 through April 27, 2012, it gained 10.7%.
If we open a historical window â€“ specifically, The Stock Traderâ€™s Almanac â€“ back to 1926, we see the S&P 500 rising 4.3% on average during May-October and gaining an average of 7.1% from November-April.
Unsurprisingly, STA editor-in-chief Jeff Hirsch is an advocate of the â€œsell in Mayâ€ approach. So is Sam Stovall, who is of course the chief equity strategist at S&P Capital IQ. As Stovall just noted to Forbes, since 1945 the S&P 500 has gained just 1.2% during the average May-October run yet advanced 6.9% during the average November-April period.
While these numbers are pretty compelling, you know what they say about statistics.
Is the argument principally flawed? If you do sell in May, where do you put your money after dumping those stocks? The strategy assumes you know of a better place â€“ an alternative to equities offering greater yield and less risk.
Larry Swedroe, director of research for Buckingham Asset Management, recently told CBS MoneyWatch that the â€œsell in Mayâ€ approach amounted to â€œpure randomnessâ€. He made his claim by running numbers in calendar years from 1950-2007 with the hypothesis of reinvesting money pulled out of equities into 30-year Treasuries during the assumed 6-month market lull. According to his research, the â€œbuy and holdâ€ crowd would have outperformed the â€œsell in Mayâ€ crowd in the time frames 1950-2007, 1980-2007 and 1990-2007, with the â€œsell in Mayâ€ adherents triumphing in the time frames of 1960-2007, 1970-2007 and 2000-2007.
The case for staying in the market. Even if the performance numbers mentioned in the third, Â fourth, and fifth paragraphs of this article were absolutely predictable annually, what would the compelling argument be for ditching stocks? Gains would still occur in spring and summer; they would just be lesser gains.
Letâ€™s go from hypothesis to reality, specifically what is occurring right now. An investor wanting a divorce from risk for the next six months could decide to bail from stocks and put the assets into short-term Treasuries and money market accounts. Would it be worth it? Maybe not. According to Bankrate.com, 6-month Treasuries were yielding 0.14% as of April 27 and money market accounts were yielding 0.46%. Throw in brokerage charges and taxes you might incur from selling, and getting in and out of equities may look less attractive.
Once youâ€™re out, when do you get back in? What if mid-October brings a rally? Do you jump in and buy? What if the bears show up at the start of November? How long do you wait for what might be the market low?
Moreover … whoâ€™s to say that U.S. economic indicators (or even global ones) might be better than expected this summer? What if the EU arranges a manageable fix for Spainâ€™s debt dilemma? What if the real estate market shows signs of heating up in the coming quarters? What if the Fed opts for more easing?
If the â€œsell in Mayâ€ strategy sounds more like market timing to you than anything else, it does have some history supporting it â€“ history worth considering. The fact remains, however, that history is no barometer of future stock market performance.
Your personal financial consultant – Monty