Weekly Market Commentary
FIVE REASONS NOT TO SELL IN MAY
Burt White Chief Investment Officer, LPL Financial
Ryan Detrick, CMT Senior Market Strategist, LPL Financial
“Sell in May and go away” is probably the most widely cited cliché in stock market history. . May is upon us, which sparks a barrage of Wall Street commentaries, media stories, and investor questions every year about the popular stock market adage. This week, we tackle this widely cited seasonal pattern, but focus on some reasons it might not work this year.
WORST SIX MONTHS OF THE YEAR
The old stock market adage “sell in May and go away” is based on the seasonal stock market pattern in which the six months from May through October are historically weak for stocks, with many believing you are better off simply avoiding the market altogether and moving to cash during the historically troublesome summer months. Stocks have gained 1.4% on average during these worst six months (since 1950*), compared with 7.0% during the November to April period.
Here are all the monthly returns for the S&P 500 Index [Figure 1]. The summer months can be rather tricky and other than a July bounce, June, July, and August have been the three weakest months of the year on average.
This brings the obvious question: If long-term history suggests these next six months are indeed the worst six-month period of the year, then why hold? While we do respect “Sell in May,” and going away for the summer months sounds like a good idea, looking at the current data in context does not actually suggest selling.
STRENGTH HEADING INTO MAY HELPS
One way to assess the longer-term direction of a market trend is to use the price compared with its longer-term moving average. One popular moving average to use is the 200-day moving average, which as the name suggests is the average of the previous 200 closes. We looked back since 1950 and found that the S&P 500 was above its 200-day moving average 48 times as it headed into the worst six months of the year. Sure enough, the average gain was 2.8%, double the average of 1.4% for all years. Also, those six months were higher 68.8% of the time, versus 62.7% for all years. Further analysis showed that the 19 times the S&P 500 started under its 200-day moving average, the index fell by an average of 2.3% over the following six months and was only higher 47.4% of the time [Figure 2]. In other words, the S&P 500’s firm uptrend in 2017 may bode well for the next six months.
THE BULL MARKET IS GLOBAL
Another reason not to “sell in May” is the strength of global markets. The S&P 500 closed at new all-time highs on Friday (May 5, 2017), but what makes the current backdrop so bullish is how strong developed and emerging markets are as well. Equity markets in Argentina, Australia, Austria, Germany, Portugal, India, Mexico, Netherlands, and South Korea are at or close to all-time highs. While not at all-time highs, markets in Hong Kong, France, Greece, Portugal, Italy, Japan, and Spain are at or near 52-week highs. The global breadth of technical strength may help lessen the potential for a big “sell in May” event.
The FTSE All-World Index, which includes nearly 50 different countries and covers 98% of the world’s investable market capitalization, is an easy way to show how global markets are doing. It broke out to new highs earlier this year and made another new all-time high last week. All in all, it further confirms this bull market is global, not just a U.S. event [Figure 3].
BUSINESS CYCLE AND EARNINGS ARE STRONG
Two more reasons we might not need to “Sell in May” are that the business cycle and earnings are both healthy and expanding. We believe the current economic expansion has the potential to continue for at least the next 12 to 18 months based on our analysis of the leading indicators. Most bear markets occur near recessions, and the U.S. economy is simply not showing signs of excesses that historically have built up and led to the end of prior business cycles. In the absence of recession, any stock market declines tend to be more modest. We expect more volatility in the second half of the year, but the generally favorable economic backdrop should encourage the dips to be bought.
Earnings have been perhaps the biggest driver of this year’s stock market gains, with the possible exception of policy optimism (the two are related, so perhaps both can stake claim). Although hard to estimate, policy could add several percentage points to 2018 earnings after what we anticipate will be mid-to-high single digit earnings gains for S&P 500 companies in 2017. We expect earnings to be supported by a slight pickup in economic growth, a stable U.S. dollar, and rebounding energy sector profits.
Corporate America is doing even better than that pace in the first quarter. A very strong 75% of companies have beaten consensus estimates, producing a growth rate of near 15% with more than 400 S&P 500 companies having reported. Most companies have offered upbeat outlooks, reiterating or increasing guidance, which has led estimates to be resilient. We expect the strong near-term earnings outlook to help support stocks over the next three to six months as it has in recent weeks.
BUYING AT ALL-TIME HIGHS CAN BE A GOOD THING
The S&P 500 closed at a new all-time high on Friday. This could, perhaps counter-intuitively, be another reason not to “Sell in May.” Analysis of the S&P 500 Index indicates that from the date of any given all-time high, the index has historically hit another all-time high within one month 92% of the time. Extending this time frame to three months increases those odds to over 97%, and extending to one year the odds approach 99%. Based on those odds, you have a very good chance of seeing another all-time high pretty soon after hitting one.
Although these numbers are reassuring, they only tell a small part of the story. Hitting another all-time high after a short period of time is great, but if those gains evaporate before a sale occurs, they really don’t matter. Are those gains sustained so they can be captured by investors over a longer-term investment horizon? The answer, historically, has been yes.
If you bought at an all-time high, the S&P 500 was on average 0.5% higher after one month. After three months the average gain was 1.8%, and after one year, the average gain was 7.9%. Six-month and one-year performance has been slightly better than the average over the entire time horizon we studied, back to 1928. Longer time horizons tend to favor investing when markets have not been at all-time highs, though the numbers still show strong performance is possible even when investing at all-time highs. It is human nature to be nervous at such times, but the numbers support investment consideration.
“Sell in May” is one of the most popular investment clichés, but it also has a good deal of historical data to back it up. But remember, no investment rule of thumb works all the time. With global equity strength heading into this weak seasonal period, improving earnings, a business cycle showing little sign of recession, and history saying new highs have usually been followed by more new highs—the odds that we see a major “Sell in May” event this year is minimized in our view. This isn’t to say volatility won’t pick up later this year, we think it will; but we would consider using any weakness as an opportunity to increase equity exposure. — —
Thanks to Jeffrey Buchbinder and David Tonaszuck for their contributions this week.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
All investing involves risk including loss of principal.
The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
FTSE All-World Index series is a stock market index that covers over 7,400 companies in 47 countries starting in 1986/ It is calculated and published by the FTSE Group, a wholly owned subsidiary of the London Stock Exchange which originated as a joint venture between the Financial Times and the London Stock Exchange.
This research material has been prepared by LPL Financial.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
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Prior Weekly Market Commentaries:
- December 11 2017: CORPORATE BEIGE BOOK: UPBEAT AS EXPECTED
- December 4 2017: 2018 STOCK MARKET OUTLOOK: DOUBLE-DIGIT RETURNS?
- November 20 2017: HIGHLIGHTS FROM ANOTHER STRONG EARNINGS SEASON
- November 12 2017: TRUMP’S FIRST YEAR
- November 6 2017: MLP WEAKNESS APPEARS OVERDONEETS
- October 30 2017: WHAT MIGHT SCARE MARKETS
- October 23 2017: FIVE REASONS TO TAKE A LOOK AT JAPAN
- October 16 2017: THE 1987 CRASH: A NOT SO HAPPY ANNIVERSARY
- October 9 2017: THIRD QUARTER 2017 EARNINGS PREVIEW: SLOWER BUT STILL SOLID
- October 2 2017: MARKETS BUYING INTO TAX REFORM
- September 25 2017: THE BULL MARKET APPEARS ALIVE AND WELL
- September 18 2017: UPDATE ON GROWTH AND VALUE STOCKS
- September 11 2017: STRONG EUROPEAN EARNINGS ARE KEEPING EUROPE CHEAP
- September 5 2017: PUTTING THE NORTH KOREAN THREAT INTO PERSPECTIVE
- August 28 2017: CORPORATE BEIGE BOOK: UPBEAT AS EXPECTED
- August 21 2017: TAKING A LITTLE RISK OFF THE TABLE
- August 14 2017: BOTTOM LINE: IMPRESSIVE EARNINGS SEASON
- August 7 2017: BUY THE DIP? WHAT DIP?
- July 31 2017: IS POLICY SKEPTICISM CREATING A SMALL CAP OPPORTUNITY?
- July 24 2017: TAX REFORM PIVOT?
- July 17 2017: GLOBAL SUMMER EARNINGS: SIZZLE OR FIZZLE?
- July 10 2017: SECOND QUARTER 2017 EARNINGS PREVIEW: Q1 A TOUGH ACT TO FOLLOW
- June 26 2017: A TECHNICAL CHECK-IN: THE GLOBAL BULL LOOKS STRONG
- June 19 2017: MIDYEAR OUTLOOK 2017: BUSINESS FUNDAMENTALS BACK AT THE CONTROLS
- June 12 2017: HURDLING OVERSEAS EARNINGS-WHAT DO THE FORECASTS TELL US?
- June 5 2017: MASTER LIMITED PARTNERSHIP MORE GOING ON THAN OIL PRICE
- May 30 2017: CORPORATE BEIGE BOOK: IT KEEPS GETTING BETTER
- May 22 2017: FOCUS ON FUNDAMENTALS
- May 15 2017: EARNINGS UPDATE: RAISING THE BAR
- May 8 2017: FIVE REASONS NOT TO SELL IN MAY
- May 1 2017: REFLECTING ON NASDAQ 6,000
- April 24 2017: EUROPE ENTERS THE TOUR DE FRANCE
- April 17 2017: WHICH BREAKS FIRST, STOCK PRICES OR UNCERTAINTY?
- April 10 2017: FIRST QUARTER 2017 EARNINGS PREVIEW: DOUBLE DIGITS?
- April 3 2017: CHECKING IN ON SOME TRUMP TRADES
- March 27 2017: THE STOCK MARKET’S FINAL FOUR FACTORS
- March 20 2017: WILL THIS SIXTEEN BE SWEET?
- March 13 2017: HOW MUCH IS LEFT IN THE TANK?
- March 6 2017: CORPORATE BEIGE BOOK: BETTER SENTIMENT AND LOTS OF TAX TALK
- February 27 2017: TIPTOE THROUGH THE TULIPS AND OTHER EUROPEAN OFFERINGS
- February 21 2017: EARNINGS UPDATE: FIVE OBSERVATIONS
- February 13 2017: REAL ESTATE OVERVIEW: ALL ABOUT THE CYCLES
- February 6 2017: TAKING STOCK OF TECHNICALS AND SENTIMENT
- January 30 2017: IS THERE STILL VALUE IN VALUE?
- January 23 2017: INTERNATIONAL STOCKS WE LOOK EAST TO JAPAN
- January 17 2017: IS SMALL CAP STRENGTH SUSTAINABLE?
- January 9 2017: FOURTH QUARTER 2016 EARNINGS PREVIEW: LOOKS LIKE ANOTHER GOOD ONE
- January 3 2017: 2017 STOCK MARKET OUTLOOK: GEARS ARE TURNING, BUT PARTS MAY NEED GREASE
- December 19 2016: A LOOK BACK AT 2016 HITS AND MISSES
- December 12 2016: CAN’T STOCKS AND BOND YIELDS JUST GET ALONG?
- December 5 2016: IRRATIONAL EXUBERANCE PART TWO?