"Sell in May and go away" is a popular Wall Street adage. After the May we just experienced, investors are saying, "True that!"
According to a May 1, 2008 CNNMoney.com article, "The old 'sell in May' strategy says that if you invest in the S&P 500 or the Dow industrials during the 'best six months' (November through April) and then switch into bonds during the 'worst six months' (May through October), you'll end up with better returns than if you did the reverse." In fact, a study by Plexus Asset Management as reported by InvestmentPostcards.com, showed that between January 1950 and March 2009, the S&P 500 index returned 7.9% per annum during the "best six months" and only 2.5% per annum during the "worst six months."
The S&P 500 performed better during the "best six months" due to seasonal factors such as end-of-the-year bonuses, the "Santa Claus" rally, and the timing of tax refunds and quarterly earnings results, according to the CNNMoney.com article. Of course, past performance is no guarantee of future results and this "Sell in May and go away" strategy does not work every year. Further, this anomoly isn't 'statistically significant' or it's supposed pattern isn't anything that can't be explained by pure chance.
But, back to the May just passed. It wasn't pretty. The S&P 500 index dropped 8.2% for the month making it the worst May performance since May 1962, according to CNBC. Rising tensions in the Korean peninsula, European debt worries, China's property bubble bursting, and the winding down of America's "stimulated" economy conspired to send investors to the sidelines, according to The Economist.
Not too surprisingly, as equity prices declined in May, government bond prices rose, according to Associated Press. This "flight to safety" suggested that diversification between equity and government bonds worked in May.
While you may "go away" this summer for some rest and relaxation, be assured that we will remain hard at work on your behalf.
OVER THE PAST FEW MONTHS, we've endured an uncontrollable oil spill in the Gulf, a volcano in Iceland that disrupted air travel in Europe, and an earthquake in Haiti that caused immeasurable suffering. These human disasters have parallels in the financial world that are worth noting.
The ongoing gusher in the Gulf is a manmade disaster that, in the financial world, looks like our country's ongoing manmade gusher of deficit spending. With the fragile Gulf ecosystem drowning in oil, our country is drowning in bills that will eventually come due. Efforts to stop the oil spill have so far failed as have our efforts at reducing our deficits. BP says drilling a relief well is the "end game" to stop the leak. What is our country's endgame to stop the ballooning fiscal mess?
The volcano in Iceland disrupted air travel for millions of travelers causing birthdays and weddings to be missed, business meetings to be cancelled, and a few extra days of unexpected expenses. But, eventually, the ash cleared and travelers went on their way. Likewise, the financial markets experience disruptions from time to time that are disappointing to investors. We call these "corrections" and they are usually temporary and not "retirement threatening." They're no fun, but we get through them.
The earthquake in Haiti came without warning and was devastating. More than 200,000 people likely died and many more will feel its effects for years to come. Poor infrastructure and lack of planning exacerbated the devastation of the quake. Likewise, the economic crisis of 2008-2009 is the financial market equivalent of the Haiti earthquake. Our country's inability to live within its means (poor infrastructure) and prepare for contingencies (poor planning) led us to a market debacle. Like Haiti surviving its calamitous quake, we can survive a market meltdown, and, ideally, learn from it so we are better prepared to withstand the next financial earthquake.
This comparison of nature's disasters to a financial counterpart is not meant to trivialize the pain from the Gulf, the volcano, and the earthquake. Rather, it suggests that we can become better investors by learning the lessons that nature teaches us. The question is, will we take nature's lessons to heart?
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* This newsletter was prepared by PEAK.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.