“Sell in May and go away” has been a familiar adage to investors for decades. The phrase is a pithy and poetic way to help make sense of the complicated global markets, and distill it into a simple-to-apply nugget. Never mind that the real-world track record for this market-timing tactic is mediocre at best.
In the last 50 years, selling stocks at the beginning of May would have avoided a loss (between the beginning of May and the end of October) just 38% of the time, using the S&P 500 as a proxy. In other words, there’s a two-thirds chance that one pays an opportunity cost by failing to remain fully invested through the May to October period.
So in 2012, we entered May, and the S&P 500 proceeded to drop about 6% in the first three weeks. It means that “Sell in May and go away” will work this year, right? Actually, the weak market had nothing to do with old clichés coming true. Stocks had rallied strongly in the first quarter of the year in response to promising economic data and solid corporate revenue and earnings, while the uncertainties and risks from Europe dropped off of the front page.
In May, elections in France and in Greece fueled a new round of speculation as to the future of the euro zone. Keep in mind that the outcome of these elections was not a surprise and did little to change the fundamental problems in Europe. Analysts have been crunching the numbers and assessing worst-case scenarios for more than two years now. At the same time, it’s fair to say that the perceived uncertainties are rising, and the debt crisis has snowballed into something of a self-fulfilling prophecy. Once unthinkable speculation that Greece would exit the EU, giving up euros for drachmas, is now turning into a real probability.
As a result, the market discounted this additional risk and stocks throughout the world corrected. Therefore, last month’s main concern – that the market seemed excessively euphoric and overbought – is no longer a primary factor in decision making. So where are we now?
Some pundits will look at the market environment heading into June as a continuation of May, and will advocate playing defense, but we don’t believe that the prevailing trend in any market environment is particularly long lasting. In the information age, market driving forces tend to come up and play out in the course of days or weeks, rather than months or years as may have been the case in the past.
As a result, we believe the recent market direction represents an opportunity to either establish new positions or add to existing positions, particularly in the cyclical and economically sensitive areas that have sold off recently. It doesn’t mean we can predict with certainty the short-term direction of the market, but certainly there are some better buying opportunities available today than there were a month ago. ...