Tuesday, April 24, 2012

Sell in May and “Go Away”?—Maybe, but Probably Not

For the past two years, we have been in an era plagued by major uncertainty. After a pretty disappointing 2011 where the only certainty was uncertainty, as we near the end of April, 2012, markets are almost at the same level as one year ago. The domestic large cap S&P500 is up 2.2%, but the Dow Jones Developed World ex US Index is down 15.7%. The Russell 2000 Index, a broad measure of the US market is down 6.4% over the past 12 months. So a lot of a portfolio’s performance was reliant on how much was allocated to domestic vs international and how much was allocated to large cap vs mid and small cap stocks.

To make things even more complicated, the performance of various sectors of the market was very different.  Despite high gasoline prices, the Energy sector is down 12%. At the same time Consumer Discretionary is up 11%.

As I wrote in January, “To many, the market is grossly undervalued.  To others, looking at the same data, the market is set for a fall.”  These are still valid comments in an era of uncertainty.  While corporate profits of large cap US companies seem to be quite strong, the risks associated with Europe, Iran, and China continue to loom large.  Then of course, we have the US deficit and the 2012 Presidential Election.

As we approach the month of May, because of the pattern in 2010 and 2011 being fresh in our minds, the old saw, “Sell in May and Go Away” will be in the press and on investor’s minds.  Here’s the facts:  A) If you sold everything on May 1 and bought the same investments back on October 31 for the past 60 years, you would have done much better than just “holding” through the Summer; BUT in those same 60 years; B) 59% of the time the stock market went up from May thru October; and C) Some summers like 2003 and 2009, markets have risen more than 15%.    The lesson: EACH YEAR IS DIFFERENT and you should act accordingly.

It is highly probable that there is now, and will continue to be some selling pressure thru the first days of May as proponents of the Sell in May and Go Away strategy execute their plans. (A self fulfilling prophesy) Added to this will be increased fears regarding Europe and China.  As I have said, there is likely to be a correction before we begin our rise to new permanent highs. (We have already seen a 4% fall from the 2012 highs—the “correction” might be as little as 5% or as high as 10%.)  

It is generally not wise to sell long term investments based on a strategy that is wrong 59% of the time. (59% of the time over the past 60 years the stock market went up from May thru October) On the other hand, it is probably wise to be cautious upon entry with new investments, using a proven “Dollar Cost Averaging” approach.

For those (and there are many) that are over-weighted in cash, remember that: 1) corporate earnings continue to be strong; and 2) price earnings ratios are relatively low. So, it is likely that sometime soon, in May or June, it is likely that we will see a long term buying opportunity that may prove to be better than most expect.

Dealing with uncertainty is a part of investing.  That is why diversification and choosing proven value oriented investments are always important strategies.  Own companies that are well capitalized, industry leaders in relatively stable markets.  Stick with segments where demand is likely to steadily increase over time.

This weblog is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.