Grizzled veterans of the trading wars have an old adage:
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“Sell in May and go away until November.”
Is this good advice or simply a myth?
Historically, the six-month interlude between May 1 and Oct. 31 has represented the worst trading period of the year. Maybe traders are more interested in their sun tans or working on their back swings than they are in playing the market.
Based on straight averages, this might seem like sound advice.
Each of the major indices, on average since its inception, has fared better from October to April than the remainder of the year. If investors had heeded this guidance in 2008, they may have avoided the 30 percent decline the S&P 500 experienced from April 30 through Oct. 31.
Although history never is the gospel, the temptation to stay in the stock market may be greater this year than in years past.
April was a terrific month for the stock market. Since falling to a record low on March 9, the S&P has rallied almost 29 percent.
Confidence Returning Fast
Companies from American Express to Ford. posted better-than-estimated earnings. Investor confidence has been bolstered by the speculation that U.S. Treasury Secretary Timothy Geithner’s plan to finance the purchase of as much as $1 trillion in illiquid assets from banks will help bring an end to the global recession.
Confidence among U.S. consumers also rose more than forecast in April, to its highest level since before the collapse of credit late last year unleashed a financial panic that sent the economy into a free fall. According to the University of Michigan measure of consumer sentiment, the confidence index posted a gain for the second straight month. This is in sharp contrast to the three-decade low recorded in November of last year.
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April also saw U.S. manufacturing shrink at the slowest pace in seven months after a collapse in inventories caused orders and production to steady. The Institute for Supply Management’s (ISM) factory index rose to 40.1 last month, higher than initially forecast. The March number was 36.3. ISM readings below 50 indicate a contraction.
Record low mortgage rates and cheap gasoline are providing some relief to beleaguered American consumers facing the prospect of mounting unemployment and job uncertainty. Home prices still are tumbling, but the drop in value has stimulated a surge in buying off the bottom.
With the extensive help provided by the federal government, banks and other major financial institutions seem to be stabilizing. Based on the preliminary results of the Treasury Dept. stress tests of the nation’s largest banks, these lenders may not be out of the woods.
Several likely will need an additional infusion of government capital to remain viable.
Still Figuring Out the Effect
On the other side of the ledger, monies from the President’s $787 billion stimulus package have yet to find their way into the greater economy. It also remains to be seen whether this massive fiscal program actually will lift consumer spending over the next six months or simply cause a further deficit drag on the economy.
The grim prospect of a swine flu pandemic also has muddied the waters.
The World Health Organization has increased its alert level from 4 to 5, indicating that a global epidemic is imminent. Although the potential toll and tragedy associated with this virus cannot be measured in dollars and cents, the prospect of an uncontrolled global outbreak has taken some of the luster off the numbers posted in April.
At this point, in the seeming aftermath of the worst financial crisis in a generation, the calculus of whether you stay or go remains highly personal.
This evaluation entails several variables and a host of intangibles. At minimum, these factors include your entry point, your true equity loss, how much you actually will lose if you sell, your belief in the economy and your tolerance for additional risk.
The markets will recover. But we have not seen the last of the volatility or uncertainty that has gripped the economy.
As TV’s Jim Cramer is fond of saying: “There’s always a bull market somewhere.” Translation: If you don’t like your current market prospects, take your money and shop somewhere else.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
