One of the great sayings of the stock market has always been, “Sell in May and go away”. Had investors sold last May they would have been up 5% on the year, instead of dead even at the end of it. January saw the big drop and then the subsequent 3-month bounce to go positive for this year.
Stock market sayings aren’t always a great guide. They are just sayings after all, but sayings originate somewhere. This particular saying originates in the very common trend to see equities decline in the summer months. The May – October period tends to be the most volatile for the stock market. It was volatile last year and saw the biggest bounce of the year in November, right on schedule.
The average return on the Dow Jones Industrial Average in the May – October period from 1950 to the present has been a paltry 0.03%. The average from November – April has been 7.5%. The last 6-month period has been break even though, with the DJIA closing only 3 points higher on May 9th than it did back on November 11th, 2015.
January was a truly rough month that is really responsible for the last six months being completely unproductive for growth and could potentially be the harbinger of a rough summer to come after the current run up.
The last two weeks have shown declines in the DJIA, with a decline of 391 points since April 20th. Declines have still been more tepid than what zenruption has been predicting for the last 3 ½ weeks, but we remain convinced that current valuations are much too high when measured against a tepid U.S. economy and world economic and political risk. Average price to earnings ratios remain at approximately 24, which only makes even some sense considering the easy money environment of the last 8 ½ years. It is still very, very little sense.
We see the recent run ups in precious metals as indicative of investors hedging against potential market turbulence. With Q1 Gross Domestic Product coming in at only 0.5% (0.9% estimate) and last week’s jobs report showing the creation of only 160,000 jobs versus the estimate of 200,000, we might buy some gold ourselves.
It is very likely that central banks across the globe will step in to hopefully stem the chance of a global recession. China’s moves have managed to shore things up a bit for now, but most of the other central banks are out of ammo. Negative rates haven’t worked as banks just raise lending rates to cover the added cost. There just isn’t much that can be done when interest rates are at or near zero.
Some technical analysts talk of breaking resistance at certain DJIA benchmarks or of the positives of the low jobs report, but we are just negative all the way around. In 2007, many of us were doing a good job of convincing ourselves that a junky house was worth twice of what is should have been. It seems stocks have become the new 2007 houses.
This year, sell in May is looking pretty good.
Lina Martinez is a contributor to zenruption's money and life sections. She seems like a Negative Nelly lately, but we all agree on what she writes during regular chat sessions on the economy. She regularly make Brian and Jerry cry over whiskey sours.
Feature photo courtesy of Flickr, under Creative Commons Attribution-Noncommercial license