'Sell in May and go away': Not among the best market tips?
Some evidence suggests that investors are better off hanging on to their shares during the May-to-October period. 'Sell in May' is among old market tips.
An old stock-market adage says "sell in May and go away," but it's a phrase that may do better at rhyming than at making money for investors.
With the calendar about to shift from April, some evidence suggests that stock investors are better off hanging on to their shares – instead of selling them off as warm weather approaches and buying again after Labor Day or Halloween.
The investment firm Standard & Poor's released some historical numbers Friday on this point. In particular, strategist Sam Stovall finds that since 1933, the S&P 500 stock index has gained 2.5 percent on average during the months of May through October. Most of that gain typically happens before the third quarter (which starts in July).
OK, that 2.5 percent rise is modest – not as strong as the November-to-April period typically brings. But it doesn't scream "sell!"
Here's the kicker: S&P identified 15 times since 1933 when it was the second year of a bull market in stocks. (That would describe 2010, too.) During those years, the average gain was 5.5 percent for the May-to-October period. Only once, in 1971, did those months see a major loss.
Of course, all this is merely backward-looking evidence. Past performance is no guarantee of future results. As in, say, this coming summer.
But the numbers provide some context for investors as they hear competing market forecasts. The S&P 500 index is closing out its third straight month of gains, and many market strategists say the bull-market case is intact for 2010 – albeit with risk of one or more downward "corrections" along the way. Two prominent reasons: gains in consumer spending and corporate earnings.
"Last week, S&P 500 forward earnings [estimates] soared again to $88.59 per share," economist Ed Yardeni wrote in a Thursday report for Yardeni Research. "The consensus for earnings in 2011 rose to $99.52.... Put a multiple anywhere between a reasonable range of 13-15, and the result is that the S&P 500 will be somewhere between 1300 and 1500 by the end of the year."
The S&P index closed Friday below 1200.
The more pessimistic view includes risks such as new declines in home prices, a phasing out of fiscal stimulus for the economy, and uncertainties such as tax policy, financial reform, and the roiling of Europe by financial woes in Greece.
Investors may feel justified to buy stocks or to dump them, but arguably the decision shouldn't hinge on the words "sell in May."