Do April Showers Bring May Sellers?

AAA

Sell in May and go away, the adage holds, a recommendation that investors ride the highs of second-quarter performance and then get out while the getting remains good.  While the most complex economic exchange on the planet cannot be boiled down to a simple truism, there's ample reason to think that stocks in the near future represent less surety than cash or bonds.  The Dow Jones has seen fantastic growth in the past six months since the October correction, indicating that the time to sell high could very well be now before another correction plunges the market down by another 1000 points.  What's the details behind the suggestion of selling on April gains in the current market?

What Is Selling High?

On the very first day of the very first class of Economics 101, students are taught that buying low and selling high represents the absolute best combination for investors.  While that's certainly true (as anyone who bought Google stock in 2002 can attest to) it's equally as true that investors will make money buying high and selling higher.  Considering that we have broken the upward trend on the market in 2015, there's likely to be new highs throughout 2015, with another autumn or winter correction in turn sending gains back down.  Given that the market has only gained about 3% in 2015, it's statistically likely that the peak value remains ahead of investors, given that the Dow Jones has enjoyed growth rates of 10% each year since 2011 (meanwhile the S+P has done slightly better since 2012).  This poses a choice to investors who can take a position of varying risk.  If 10% growth remains on the table, would you prefer to watch your early-blooming stocks of this year grow further, or would you prefer to cash out while the chips are up?

A Numbers Game

While the adage of selling in May and going away is not terribly practical advice, some numbers hint at its profundity.  A famous study from the Edinburgh School of Business found that stock market return averages negative numbers during the third quarter of the fiscal year, regardless of stock type, investment pattern, or even market of a different nation.  That makes your money better served sitting in a savings account, or even losing money on interest as raw cash.  What's more, the study concluded that high-beta stocks (top quartile of volatility) are particularly prone to shedding value in the summer months by a tune of three to four percent, then making up the difference with scorching gains in the winter months of around 25%.  As such, the adage here may be not to buy low and sell high but to sell high, wait, then buy high again. 

Exceptions To A Non-Rule

Just as in all aspects of economics, you can certainly find proof of a contrarian position to any opinion.  If you hold tight to the belief that your money is best served in the stock market during April and in commodities or real estate or liquidity during May, there's an ample amount of evidence that points in the opposite direction.  The market gained more during the summer months of the global financial crisis than it did during the winters before and after.  Anyone who chose to put their money into the S+P during the autumn months of 2000, for instance, would have found their net worth significantly reduced by the onset of spring in 2001.  The same is true for the winters of 1990 and 1982.  This may seem appealing for some -- after all, if it's happened only a handful of times recently, the odds are in favor of summer decline -- and risk inducing for others who would rather not see their livelihood become a statistic in a finance textbook. 

The Real Factors At Play

Above all else, the stock market doesn't depend on pop wisdom in order to rise and fall.  Real events manipulate the price of the Dow Jones and S+P, and a series of real events suggest a stock slump could very well be on the horizon.  European borrowing costs have reached their highest level yet in 2015 after hitting historic lows this winter -- lows so historic that the Netherlands were borrowing money for next to nothing thanks to bond prices that are the lowest they've reached in the 500-year history of the Dutch trading in bonds.  Poor US jobs data throughout 2015 have kept the dollar's revitalization on mute; while a lot of currencies around the world are slumping, the dollar is happy just to be doing "good enough".  With a less-than-great job market and a less-than-great dollar, it's hard to properly value corporate equity in the US, which makes stock prices somewhat thin and particularly volatile.  The Dow, S+P, Eurofirst Index, and MSCI World Equity Index have all lost up to .5% value in the early days of May.  At the same time, bonds have risen in both US and the EU. 

Taking Action, Or Not

The stock market will go up further in 2015, that's a certainty; it's just not certain whether it'll go down first.  Historically, the Dow's performance suggests that what's good now won't be great for the next three to five months, a position that's in line with economic data from around the globe.  At the moment, selling high in May and turning your money to bonds appears to be a solid decision for conservative investors looking for less risk in their portfolio.  Those with more time, patience, or courage for their investments may want to ride out their summer stocks, but with bond prices looking the best they've been in the entirety of 2015, it's a particularly good idea to augment stocks with bonds to make up for the loss of one with the gain of the other.

Related Articles

How To Game Market Volatility Winners and Losers in 2015 InBev: Winning The Beer Wars Sell High on Chipotle? Amazon's Holiday Preview
Your browser is out-of-date!

Update your browser to view this website correctly. Update my browser now

×