May 2, 2013 Sell in May and Go Away
A tried and true investing maxim is “sell in May and go away.” Loosely translated, this means that in most years, the stock market has a seasonality to it that is quite reliable in predicting the rise and fall of the market.
Essentially history has taught us that that investors should cash in their investments before mid May and take the summer off. In most years, this hasn’t been a bad strategy. Traditionally the market starts rising in the fall (usually October) then pauses, then rises at the end of the year in the Santa Claus Rally. January through May usually sees a run up and then June through September have been the worst four months of the year for the S&P 500 Index since 1988. For the commodities markets, and the junior commodity stocks, this has been even more exaggerated.
But not in 2012 and not in 2013.
The Unpredictability of the Market
Recently I published a blog that discussed how old adages have to be taken into account as they are often quite accurate, but at the same time there is no such thing as conventional wisdom about the stock market.
In that blog I discussed how the expected Santa Claus Rally never occurred in 2012, even though seasoned investors were sure the rally was coming.
Similarly, many of the tried and true axioms of the past, have to be taken in context of today’s circumstances.
Today’s Circumstances
The economy and the stock market run in cycles. This is a Cycle Just Like All previous Cycles.
There have always been cycles and there will always be cycles.
A Brief History
Like many government well intentioned efforts, the removal of the division of the four pillars of financial, coupled with laws to promote availability of housing loans to those unable to afford them, resulted in a meltdown in 2007 of structured loans and funds. This was followed in October 2008 witha stock market meltdown of historic proportions. A slight stock market recovery in 2009 resulted in a further meltdown of the stock market in March 2009.
Money became impossible to loan and large and small businesses globally became threatened by bankruptcy in 2009 and 2010. The government stepped in with a series of quantitative easing, resulting in public debt reaching highs unmatched since war years.
You Can’t Slove a Debt Crisis With More Debt
While debating the wisdom of governments supplying all of this printed money, its effect was more massive public debt piled on top of already government existing debt of unusually high proportions.
As prosperity grew in the 2000’s, people failed to see reality and more and more borrowing for ‘The Good Life” became the norm. Don’t worry about owing money became the mantra. If we want anything or feel like having anything, just borrow the money. Paying back debt became a non-issue for governments and individuals alike, the reason being that more debt to pay off old debt was easily available.
The Result
So when governmental Quantitative Easing was piled on top, the debt became unmanageable. US government, although both parites were equally responsible, became entwined in a political statement over debt. China saw threats to its export machine and instituted Quantitative Easing. Europe was already in so much debt, that Quantitative Easing did not appear until a year later.
Where We Are Now
All of these massive distortions to the world economy have caused havoc with the timing of the old adages. For every government action, there is a reaction. These reactions, most of which are not foreseeable or predictable, have caused distortions to the stock markets of an unprecedented scope. So when we expect to Sell in May and Go Away, it isn’t true this year.
What should have been the strong season for stocks – March & April – were periods of weakness. Stocks generally fell.
What Will May Bring to the Stock Market
It is beginning to look as if May might be a very strong month with rebounding of values. Obviously it is too early to judge at this point, yet strong signs are in evidence. It could be that all of the disruption in normal economic cycles have brought a pent up demand that is straining against normal hesitations.
Buying Value
The question is how do we deal with this? We have patience and we buy value. A strong company with underlying value and good management is going to be there this year and next. It is important to realize that the stock market, with all of its fraud, malfeasance and trickery, is still where people invest their money and is still the marketplace for companies to raise capital, to merge, to acquire, and to deal.
All that has changed is that government has artificially affected the market, as it always tries to do with good intentions and with bad results.
Investors should have patience and realize that as the economic circumstances of the world’s population improves, so does their appetite for goods and services. Normality will return.
In the meantime, don’t be totally reliant on old maxims of thought and wisdom.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
