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VOL. 39 | NO. 21 | Friday, May 22, 2015

Sell in May and Go Away? History supports strategy

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Prior to the summer of 2011, if you were a follower of the Memphis Grizzlies, you could forget about the team by the end of April.

When the April calendar turned to May, the Grizz faithful moved on to vacations, baseball and fireworks. Once November came around, the interest returned for the next 6 months, only for the cycle to begin again the next April.

Even the playoff runs from 2004-2006 ended swiftly, as three consecutive sweeps were but a tease.

Sell the Grizz in April and go away until November.

Coinciding with the arrival of the Grizzlies’ Core Four, 2011 produced the inaugural franchise playoff series victory, and Grizz interest is now a year-round phenomenon as fans expect to be watching winning basketball well into the summer.

The seasonality phenomenon of the investing calendar ironically has a similar feel.

Investors might be inclined to “Sell in May and Go Away,” liquidating securities at the end of April and not returning to the markets again until early November.

The numbers, depending on how you look at them, do lend some support to the strategy.

Going back to 1926, the S&P 500 has produced annualized total returns of 13.4 percent November thru April, while the returns have been 6.8 percent May thru October. The monthly return data going back to 1950 looks like this:

S&P 500 average monthly returns since 1950:

January, 1.0 percent

February, 0.1 percent

March, 1.2 percent

April, 1.5 percent

May, 0.2 percent

June, 0.0 percent

July, 1.0 percent

August, 0.0 percent

September, -0.5 percent

October, 0.8 percent

November, 1.5 percent

December, 1.7 percent

The trend still holds, although the only month that has seen average negative returns is September.

What about the last three years? The S&P 500 return for the May to October time period for 2012, 2013 and 2014 was 1.0 percent, 10.0 percent and 7.1 percent, respectively.

Summer investing has been a pleasant experience of late.

What do we think about 2015? On the glass half empty side, keep in mind that since 1980, the S&P 500 has experienced average intra-year drops of 14.2 percent.

The last time the index had an intra-year downturn larger than 10 percent was 2011, when the market retrenched by 19 percent.

U.S. equity market valuations are frothy, and keep in mind that if the S&P 500 ends calendar year 2015 positive, it will be the first time in history that the S&P 500 has had seven consecutive positive return calendar years.

Could the United States equity market be due for some sort of pullback?

What about a glass half full approach? The underpinnings of the U.S. economy appear to still be firming, thereby pushing down the probabilities of a near-term recession.

Interest rates remain historically low as the Fed continues to err on the side of caution, while central bankers across the ocean are maintaining an open spigot.

For global investors, there have already been some substantial equity market retreats within the last few years, resulting in more compelling valuations outside of our borders.

Maybe the seasonality head fakes of the past three years will continue through 2015?

In summary, it is anybody’s guess about what this summer will bring.

The calendar can influence returns, but many other variables come into play as well.

Sell in May and Go Away? Yes and No!

Sources: Leuthold, Fidelity, Strategas, CNN, JP Morgan

Mark Sorgenfrei Jr. is vice president and investment analyst for Waddell & Associates Inc.

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