In late April, I authored a pair of articles demonstrating the unique calendar effect that favors "Sell in May". While for most Seeking Alpha readers I believe that a a long-term buy-and-hold strategy tailored to your personalized investment horizon and risk tolerance is your best investment option, the calendar effect in bond and equity markets is notable and meaningful. In these articles, I showed a seasonal equity/long Treasury strategy and a high yield bond and long Treasury strategy that both generated meaningful alpha. After last month's risk-off tone in risky assets and strong Treasury rally, these strategies are poised to outperform once again.
Stocks from November to April; Long Treasuries From May - October
Using sixty-plus years of data, dating back to when the benchmark U.S. equity index first went to 500 constituents, I broke market returns into these two semi-annual components. This study yielded some surprising results. As seen in the table below, the annualized return for domestic equity investors for the six months from May to October inclusive has been a disappointing 4.9%. Conversely, returns from November to April were an astounding 16.3% annualized.
For more trading-oriented portfolios looking to tactically reposition over shorter-time intervals, I decided to examine a strategy that held the S&P 500 (SPY) from November to April and owned long duration U.S. Treasuries (SPTL) during the period from May to November. Using data dating to 1973, the longest data set I had for long Treasury returns, I have found that this bi-annual switching strategy has generated structural alpha.
The results are fairly striking. This 1973-2018 time frame was a great period for U.S. stocks, which produced annualized returns of just over 10% over the sample period. The seasonal U.S. equity/long Treasuries strategy did even better, producing a 13.5% annualized return. As one would expect for a strategy that owned Treasuries half of the time, the switching strategy also produced less variable returns.
In May, the S&P 500 (SPY) notched a -6.35% total return, its worst worst May return since the 1960s. On the flip side, the long Treasury index posted its best monthly return (+6.54%) since January 2015 and its best May return since 2012. The 'Sell in May' strategy that would have exited equities at the end of April and bought Treasuries would have outpaced the broad equity market by a whopping 12.8% in May.
Junk Bonds from November to April; Long Treasuries From May - October
A similar trend continued to high yield credit. As I wrote in A 'Sell in May' Bond Strategy, owning high yield credit from November - April and owning long Treasuries from May to October has produced nearly 13% annualized returns with very low drawdowns - an amazing return profile for a fixed income strategy. The high yield bond market lost 1.19% in May after starting the year with a very strong rally. A swap to long Treasuries (+6.54%) would have produced a 773bp positive return versus the high yield index, the largest monthly return differential between the two asset classes since January 2015 and 13th largest monthly return differential in the 35-year dataset.
I find these calendar effects fascinating, but other than a modest increase in rate duration into the rally in my portfolio, and a modest reduction in overall equity beta prior to the sell-off, I did not put this strategy to good use! Despite decades of evidence that there is something behind these calendar anomalies, I have found it hard to pull the trigger in my portfolios. I hope this follow-up on these strategies after May's performance proves thought-provoking for Seeking Alpha readers.
Additional disclosure: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.