The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
Stop me if you've heard this before. Sell in May and go away. (I was tempted to just write those 6 words over and over again for the entire column. Like Jack Torrance in "The Shining." All work and no play does make Paul a dull boy.)
The notion that investors should dump stocks at the start of spring because the market often slumps in the summer is a tired Wall Street myth.
Sure, stocks do sometimes dip from May through August. And the market sell-off on Wednesday was a painful reminder of how volatile stocks can be once the weather starts to warm up (at least for those of us in the Northern Hemisphere) and we see more commercials for summer blockbuster movies.
But during the years when stocks have gone down in the second quarter and beginning of the third quarter, it was usually with good reason. Earnings were sluggish. The economy was losing steam. And in the case of the past few years, the spring/summer stock swoon (alliteration is fun!) happened after the market enjoyed a hot start to the year.
Why should any sane investor make tweaks to their portfolios just because of what month it is? That makes no sense. You could wind up missing a decent rally.
"You can't go off to an island and sip piña coladas for a few months," quipped Phil Orlando, chief equity market strategist with Federated Investors.
Just look at 2009. The market hit rock bottom in March 2009, but there were still many questions about the health of the economy and the nation's financial system. It would have, at first blush, seemed reasonable to be skeptical and sell stocks in May. After all, the S&P 500 rallied more than 30% between the demonic bear market low (666.79) on March 6 and April 30. But if you went away in the summer of 2009, you wouldn't have been too happy come Labor Day.
Now things were obviously a lot different in 2009 than they are today. That was the bull market's infancy. We're now four years into this current rally.
And the sell in May philosophy did work in 2010 and 2011. But that was due to significant concerns about Europe in 2010 (the Flash Crash didn't help boost market confidence either) and worries about the Congressional debt ceiling battles in 2011 that culminated with Standard & Poor's stripping the U.S. of its AAA rating that August.
If you adhered to sell in May last year, you would have been disappointed again. Unless you came back just one month later.
After a dismal May, stocks resumed their rally last summer once it became clear that the Federal Reserve was going to continue stimulating the economy for a long time, Europe was not collapsing, and earnings growth was picking up.
That sounds a lot like current market conditions.
"Data will determine whether or not stocks should be bought or sold, not the page on the calendar turning," Orlando said.
There's also the issue of how long investors should really sit out of stocks in the first place. The sell in May phrase is a cute way of making light of the fact that volume dries up during the summer doldrums as many Wall Street professionals are on vacation. Goodbye, Manhattan and hello Hampton jitney!
But trading activity and news flow usually return with a vengeance after Labor Day. Still, September is historically the worst month for stocks. And October is notorious for some of the most famous one-day crashes.
So should investors realistically only own stocks from November through April? Even though stocks tend to fare better during those months, market timing seems silly.
"Yes, there is some seasonality to the stock market. Stocks often do better from November through April. But what people forget is that stocks are still usually up from May to October too. So you'd miss out on returns during those months if you sell in May," said Mike Binger, senior portfolio manager for Gradient Investments.
Both Binger and Orlando said they are still bullish. With interest rates this low and gold prices plummeting, they think stocks remain a much better bet than bonds or commodities. And with Ben Bernanke still preaching the gospel of quantitative easing, Binger joked that "Don't fight the Fed" should trump "Sell in May" in terms of Wall Street trading rules of thumb for the rest of the year.
Sure, there are legitimate reasons to be worried about whether the bull market is finally running out of steam, particularly with the Dow and S&P 500 near all-time highs.
But the mere fact that we have now entered the fifth month of the Gregorian calendar should not be viewed as a signal to sell stocks.
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