Now they
have new cause for concern, statistically at least. The arrival of May means
the beginning of a six-month period in the stock market when returns typically
are meager at best and often negative.
Is it
time to scale back?
A
seasonal timing strategy with a hard-to-ignore record for reliability suggests
it is. "Sell in May and go away" holds that if you shift your holdings
out of stocks into bonds, return to the market in November and do the same
thing again every year, you'll come out way ahead.
Investors
could be forgiven for smirking at the notion. Many financial professionals do.
"There's
no easy formula regarding the best time to buy and sell investments," says
Jonathan Bergman, a certified financial planner with Palisades Hudson Financial
Group in Scarsdale ,
N.Y.
"And don't try to time the markets."
Yet this
is no gimmick that forecasts the market based on numerology or the Super Bowl.
It has enough historical accuracy behind it that plenty of financial advisers
pay attention even if they don't agree or adhere to it, according to Austin
Frye, a planner with the Frye
Financial
Center
in Aventura ,
Fla.
"Sell
in May" is more an indicator than a strategy. You'd be hard-pressed to
find investors who withdraw their holdings on May 1 and put them back into
stocks Nov. 1. But it may help guide investing decisions to know the
implications of buying or selling at various times of year.
The
concept has compelling support:
- Since
1950, the Dow Jones industrial average has produced an average gain of 7.4
percent from November through April and 0.4 percent from May through October.
- An
investor who sank $10,000 into the Dow during the "best" six-month
period (November through April) and switched to bonds during the
"worst" six months in every year since 1950 would have posted a
return of $527,388, according to the Stock Trader's Almanac. Doing the reverse
would have cost the investor $474.
- Applying the approach to the Standard & Poor's 500 index, its returns from
November through April have beaten those during the following May-October
period 71 percent of the time dating to 1945.
- Adhering to the practice also would have reduced risk. For whatever reason, the
stock market crashes of 1929, 1987 and 2008 occurred between May and October.
While
skeptics call it a random pattern or statistical anomaly, the period from
Memorial Day to Labor Day features less market activity during vacation season,
weighing on returns. And the rest of the year benefits from end-of-year
bonuses, tax refunds and pension-fund contributions that translate to increased
buying.
This
year, the approach may seem especially timely to those who believe the market
is poised for a pullback after a period of remarkable gains.
Roaring
back from the financial meltdown of 2008 and early 2009, the S&P 500 has
risen 75 percent since bottoming out nearly 14 months ago. The Dow Jones has
rebounded 68 percent.
"Should
you believe this bull market has come too far, too fast, and believe a
challenging period lies ahead for stocks, you may want to consider this
semi-annual rotation strategy," says Sam Stovall, chief investment
strategist at Standard & Poor's.
Current
stock values suggest a disappointing rest of the year in the market, according
to Jason Hsu, chief investment officer at Research Affiliates in Newport
Beach , Calif. "Valuation levels across the board are pretty well stretched."
All the
positive developments about the economic recovery are priced into the market,
Hsu maintains, while none of the bad things are: the outlook for continued high
unemployment, rising federal debt, states' deepening fiscal woes and the
prospect for higher taxes.
One problem
with making a shift this May is that bonds don't have a great outlook, either,
with interest rates expected to rise as the economy strengthens. When rates
increase, bond prices decrease. As Stovall puts it, "Sell in May and go
where?"
Then
there's the matter of the adage not having held to form in 2009, when the Dow
jumped 18.9 percent from May through October. (In the just-ended
November-through-April period, it rose 13.3 percent.)
"Had
we sold in May last year, we would have missed a huge rally on Wall Street and
I would have faced a veritable client revolution in November," says Frye.
"Given how well the market has done over the past twelve months, perhaps
this is the year that the theory will work like a charm."
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