David Evanson and Oliver Pursche
Forbes.com, Spring, 2013
This being one of the last days of May, I thought it appropriate to revisit the old chestnut ‘Sell In May And Go Away.’
In 2011, you would have done well with this strategy as equities broadly lost about 11% over the summer. In fact, the summer of 2011 marked nearly the low point, from which equities have reached current all time highs.
Last year (2012), markets displayed some volatility, but held up fairly well. As a matter of fact, if you had sold on May 1, 2012 and stayed out of the market until October 1, 2012 (the time frame advocators of this strategy typically recommend) you would have missed about 3.5% worth of gains.
This year, our investment committee’s consensus is it’s not the time to go away either. Despite some cracks and some worries—yet honestly, when isn’t there something to worry about?—this market still has legs. I base this bullish bias on five key factors that didn’t consistently apply over the past several years and remain optimistic that new highs are likely to be achieved before year-end.
Corporate earnings growth has been surprisingly robust. Over two thirds of S&P 500 constituent companies beat first quarter earnings per share expectations, whose reporting season ended in late May.
Debt crisis abatement
Although far from done with, the European debt-crisis is abating and some stability is returning to southern European economies. This is largely due to the significant policy shift by the European Central Bank (ECB) from “austerity only” to a combination of QE like asset purchases, more accommodative monetary policy and more flexible austerity measures.
Quantitative easing has, ah gained currency in Japan. And how. At the current pace, Japan’s actions are nearly 50% greater than those taken by the United States on a relative basis. Until this past March, the Bank of Japan was the only central bank that did not engage in quantitative easing and asset purchases.
The U.S. housing market is showing meaningful and sustainable improvements, with both sales volume and prices rising at a steady pace for over 10 months now.
Although far from healthy, the U.S. labor market is also showing signs of improvement. In the first five months of the year, nearly 1.3 million new jobs were created. Further, the average length of unemployment has been reduced by roughly 3 weeks, or 8%.
Of course there is also plenty to fret about in the environment. We are keenly aware of the more drastic than anticipated slow-down in the Chinese economy, the ongoing partisan gridlock in Washington, DC that has caused the country to briefly go over the fiscal cliff and is now subjecting many state and federal employees to furloughs and other cuts related to sequestration.
As mentioned, there’s always something to worry about, and there always will be. However, on a net basis, there’s more positives than negatives, and for now, I believe the summer belongs to the bulls.