Will investors sell in May and go away ?
(Elvis Picardo is an investment strategist with Northern Securities
Inc in Vancouver, Canada, and a guest columnist on reuters.com. The
opinions expressed are his own.)
VANCOUVER (Reuters.com) -- Poet T.S. Eliot called April the cruelest
month, but for U.S. equity investors, it's the May-October period that
seems to hurt the most. Historically, that six-month period of the
year has consistently underperformed the other six months. It's what
investors call the "sell in May and go away" phenomenon.
That is, until this past year, of course. But before you jump into the
bull camp, you may want to listen a little harder to the bears.
Concerns about the credit crunch and a U.S. recession, which weighed
so heavily on global financial markets in the first quarter of this
year, now seem to have dissipated to a considerable degree. These
receding fears are reflected in the recent performance of U.S. equity
indexes, which have rebounded nicely from their mid-March lows.
If that performance continues, it would fly in the face of the "sell
in May and go away" crowd.
Despite the optimism, however, there is a growing chorus of market
heavyweights advocating caution as we head into this intriguing six-
month period.
First, the evidence: According to the Stock Trader's Almanac, over the
56 years from 1950 to 2005, the Dow Jones Industrial Average gained an
average of only 0.3 percent in the six months from May 1 to October
31. The average gain over the six-month period from November 1 to
April 30, however, is 7.9 percent.
This pattern held up in 2006 for both the Dow Jones and the S&P 500.
While the Dow Jones rose 6.3 percent and the S&P 500 advanced 5.1
percent from May to October, both indexes fared even better in the
following six months, with gains of 8.1 percent and 7.6 percent
respectively.
But it has been an altogether different story in 2007. The Dow Jones
rose 6.6 percent from May to October, but has declined 7.6 percent
from November to date. Likewise, the S&P 500 gained 4.5 percent from
May to October, but has tumbled 9.9 percent since November.
While the recent market recovery likely reflects optimism that the
worst of the credit crunch may be over and that the U.S. recession may
be short and shallow, not everyone is on board. Warren Buffett, the
billionaire Oracle of Omaha, yesterday added his voice to the cautious
camp, saying the recession will be longer and deeper than most people
think. On a similar note, former World Bank President James Wolfensohn
said that he is pessimistic on the outlook for financial markets.
Others who have opined recently that it may be premature to believe
that the end of the credit crisis is imminent include a number of
disparate parties such as U.S. Treasury Undersecretary Robert Steel,
the Bank of Canada and PIMCO co-CEO Mohamed El-Erian.
Meanwhile, the bull camp - consisting of those who think that the
credit crisis is close to an end - currently comprises the CEOs of
Citigroup, Morgan Stanley, and Goldman Sachs. But with Citigroup and
Morgan Stanley having racked up $53 billion in asset writedowns and
credit losses since the beginning of 2007, investors may be inclined
to take their prognostications with a large dose of skepticism.
Given these differing opinions, investors will be keenly awaiting the
FOMC announcement tomorrow for clues on the Federal Reserve's
*****sment of the economy. In the very near-term, the Fed's rate move
and views are likely to be instrumental in determining the direction
of the markets from this inflection point.
And whether investors do indeed sell in May and go away.
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