The phrase "Sell in May and go away" is well-known to many investors and has been covered a lot on Seekingalpha. The consensus view is that the summer months are a poor time for equities, and investors would be better off selling equities and returning to the markets later in the year following this summer lull. I don't actually buy into this theory and have summarized my views below:
1. Law of averages show you are better staying in markets
I have looked into the performance of the S&P 500 over the last 20 summers, and on 13 out of 20 occasions, the S&P 500 Total Return was positive (see table below). So if you knew nothing about the markets and did not have any view whatsoever, the law of averages shows that you are more likely to make money than lose money by staying in markets.
S&P 500 Total Return, USD, 1st May - 1st September
13/20 positive months. Mean Return is 0.44%.
Looking at the returns more closely, there has never been more than 2 consecutive years of negative returns over the summer months.
2. Where to allocate Cash?
As investors, if we decide to liquidate our equity positions, we need to find somewhere else to invest this capital. Central bank policy, through ultra low rates, has led to cash yielding near zero, and having a negative real return once inflation is factored in. As such, I do not consider this a suitable asset class to invest in. The Fed's bond buying policy has also helped force bond yields to historical lows. As investors, we are paid very little now to bear the risk of holding bonds, and with the US recovery unde way interest rate rises could be soon upon us, which would hit bond prices. Again I do not consider bonds a favored asset class currently.
3. Rotation into Equity Markets
There is a rotation from cash and bonds into equities that should support equity valuations. Although this rotation is well underway, pension funds and retail investors are often slow to react and many still have cash parked on the sidelines ready to invest. Pension funds have been reducing their equity exposure over the last decade; however, as bonds become expensive and are not providing returns sufficient to cover liabilities, many pension funds are now looking at equities to provide this return. What we are likely to see is a strong flow of monies into equity markets, and this demand should underpin prices.
4. Strong Earnings supporting Equity Valuations
Q1 reporting season is well underway, and a high proportion of companies have so far have beaten earnings targets. This highlights the strength of many businesses and will lead to re-ratings of certain stocks. There has also been a trend for companies to increase dividend payments; Apple (AAPL) and Suncor Energy (SU) did just this following Q1 results.
Empirical evidence over the last 20 years does not support the hypothesis that equity markets fall over the summer months. Of course, there have been occasions when this has occurred, but there is no overriding trend. When factoring in the macro tailwinds and also lack of alternative asset classes, equities, for me, are the asset class of choice.