Publishing Note: I am traveling abroad (my wife and I are visiting Ireland) during the next 2.5 weeks. Thus the "Daily State" report will be published as time permits.
Good Morning. My digital calendar informed me this morning that the month of May has officially arrived. And according to Wall Street's folklore, this means that it may be time to do something other than invest in the stock market for a while. But to be honest, I've never put much credence in the old saw, "Sell in May and go away" as stocks have only fallen during the May-October period 11 of the 32 years I've been in this business. But, I will have to admit that it's been a profitable strategy of late and as such, I thought I'd dig into the data to see whether I should just extend my stay in Europe until after Halloween.
The theory holds that stocks tend to do very little from the beginning of May until the end of October. A review of history actually backs up the concept. For example, since 1950, $10,000 invested in the S&P 500 during the months of May through October would have become $15,234 as of the end of 2011. Obviously a 50% return is nothing to sneeze at. However, if one had invested the same $10K in 1950 and decided to only be invested during the months of November through April, their account would be worth more than $445,200. Hmmm ... I think I'll take door #2.
In looking more closely at the data on a year-by-year basis, it becomes clear that when "Sell in May and go away" is successful, it tends to be very successful. But in looking at the returns since 1950, the market has been down in the May-Oct period just 23 out of the 61 years. However, when the middle of the year turns sour, the average decline in those years winds up being -8.32%. Ouch. So there definitely appears to be something to this little cliché.
What's more, the old saw has been fairly effective since the secular bear began in 2000. Since the turn of the century, "Sell in May" has been successful exactly one-half the time with the average decline in the down years coming in at -12.1%. On the flip side, the average gains in the up years was +8.23%. So, as you can plainly see, the idea of working on your golf game until Halloween definitely has merit - especially during secular bear environments.
But before you start buying SDS on margin this morning, we should point out that the month of May tends to be pretty darn good overall. If one looks at the record of the SPY (SPDR S&P 500), May winds up tied for 4th place overall with an average gain of +1.4% during the month and has been positive 60% of the time. However, June's average gain of +0.2%, July's +0.6%, August's +0.4%, and September's -0.7% tend to be far less profitable as a group.
A similar, but far worse pattern emerges if one takes a look at the market in terms growth versus value during the much ballyhooed "Sell in May" period. The SPYG (SPDR S&P 500 Growth) has enjoyed a decent month of May (+0.6%), but then June (+0.1), July (+0.1%), August (-0.8%) and September (-0.4%) are not great times to invest in growth. And while it may sound counterintuitive, the summer months have been even worse for value oriented issues.
In looking at the SPYV (SPDR S&P 500 Value), May winds up being tied for 6th place among calendar months with an average gain of +0.9%. However, June's average result is -0.8%, July is +0.6%, August is -0.7%, and September's average is +0.2%. So for those thinking that it might be a good idea to "hide out" in value stocks during the "Sell in May" period, you may want to think again.
Finally, in looking at the total stock market index via Vanguard's Total Stock Market ETF (VTI) reinforces our point this morning. Historically May has been good, coming in tied for 4th as the best average return for the month has been +1.4%. But again, the summer rally tends to fade as June has averaged -0.6%, July sees a rebound of +0.7%, August declines -0.7% and September drops -0.4% on average.
So for all of you out there that are thinking that the calendar says it's time to sell, history actually suggests that you may want to wait another month. However, given that the seasonal patterns are hardly foolproof, we'll simply stick to our discipline and understand that things may (or may not) get bumpy in the coming months.
Turning to this morning ... Most foreign markets were closed overnight for May Day celebrations. However, a larger-than-expected interest rate cut in Australia and a PMI report in London is keeping U.S. futures looking modestly higher ahead of this morning's data.
On the Economic front ... There is no data scheduled for release before the bell today. However, we will get the all-important ISM Manufacturing report as well as the numbers on Construction Spending at 10:00 am.
Major Foreign Markets:
- Australia: +0.67%
- Shanghai: Closed
- Hong Kong: Closed
- Japan: -1.78%
- France: Closed
- Germany: Closed
- Italy: Closed
- Spain: Closed
- London: +0.42%
- Crude Oil Futures: -$0.22 to $104.65
- Gold: -$1.00 to $1663.20
- Dollar: lower against the yen and euro, higher vs pound
- 10-Year Bond Yield: Currently trading at 1.925%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +1.86
- Dow Jones Industrial Average: +26
- NASDAQ Composite: +5.58