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Old Adage


Image by Gerd Altmann from Pixabay
Sell In May... Or Not? *

If you’ve been invested for at least a couple of years, you’re familiar with the old Wall Street adage, “Sell in May and go away.” It refers to the period between May and October when the market - on average - underperforms the prior six months. The adage suggests you’d be better off in cash from May to October.


Like all proverbs, maxims, and saws, there is a grain of truth in there somewhere. Indeed, history clearly shows the market’s strongest six-month period is November to April. History also shows September to be the most active hurricane month. Does that stop people from going to the beach that month? Not the beaches I try to book for a vacation. Why?


Well, if you’ve ever been to North Carolina’s Outer Banks in September, you know that the temperature is inching down from stifling August. That the water is still warm. That the breeze is as welcoming as the Wright Brothers found it for the 12-second flight of the Wright Flyer in 1903.


So for people like me, the benefits outweigh the risks; we trek across multiple states, stake out a sandy claim, and spend a week baking like a Rock Cornish hen in spite of the threat of savage weather.


I suspect investors, around May, do a benefit/risk calculation of their own. In the benefits column, one needn’t look any further than last year. Every bit of the carnage that was wrought by the COVID 19 market collapse was over and done with by late March, 2020. Come May, the market was on a tear. The S&P 500 gained 16.5% from May 1 to October 30. Our strategies moved up in like fashion. To have been out of the market during that interim would have been leaving serious money on the table.


Now is a good time to insert the following: Past performance is no guarantee of future results.


The month of May 2021 has shed no light on coming trends. The market action could be summed up this way: up, down, up, down, up, down.


What do the analysts have to say about the near term, old adages notwithstanding?


· RBC Capital Chief Strategist Lori Calvasina: “Our new [May 4th] EPS forecasts bake in better margins and buybacks than our previous forecast… We see a little more room for stocks to climb higher this year, but that we also continue to expect a pullback or heightened volatility in the market before the year is done - capping that upside."


· Credit Suisse strategist Jonathan Golub: "Consensus GDP forecasts call for 6.3% real (8.6% nominal) growth in 2021, the fastest pace in nearly four decades. Every 1% improvement in nominal GDP translates to a 2.5-3% gain in S&P 500 revenues..."


· Duquesne Family Office CEO Stanley Druckenmiller: “I have no doubt, none whatsoever, that we are in a raging mania in all assets. I also have no doubt that I don’t have a clue when that’s going to end. I knew we were in a raging mania in ’99 and it kept going on and if you had shorted tech stocks, say, in mid-’99, you were out of business by the end of the year. But we are still long the stock market. We’re not as long, nearly as long, as we were four or five months ago. We’re still playing the game… But I will be surprised if we’re not out of the stock market by the end of the year.”


· Ritholtz Wealth Management CEO [and CNBC contributor] Josh Brown: “All of the inflation that you’re seeing right now is being driven by the wealth effect from the stock market… Everybody that you know that’s remodeling their house – why do you think they’re doing that? Because their 401(k) became a 601(k)... All of the wealth effect is coming from the stock market. So, if you think inflation is a threat, just understand something: If stocks cool off, that threat will be neutralized. People will come right back to this idea of, ‘Well, what else do I do with my money?’ and go right back into stocks.”


My takeaway from this admittedly small sample: the bull market continues, but there’s something ugly up ahead. You can call that a “pullback” or a “cooling off” or the sudden end to a “raging mania.” Of course, in the stock market, ugly is always right around the corner.


As are hurricanes to pristine beaches.


As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection[1 - see below] remains paramount.


Best always, David


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* Photo Attribute: Image by Gerd Altmann from Pixabay

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[1] What does protection look like? At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance. Protection can also mean an overweight position in a model built for protection (i.e., Bond Bulls, The 12% Solution). It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown. Finally, protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts that hold up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.


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