Grow Assets Like Tractors
Doug Walters
After a good start to the year, should investors consider taking risk off the table? After all, is it not well-known that investors should sell in May and go away? We prefer factors and tractors.
Contributed by Doug Walters , David Lemire , Max Berkovich , Eh Ka Paw
April is ending, and the stock market has had an excellent start to the year. So, it must be time for investors to “sell in May and go away,” right? Not so fast. We’ll take the lid off this frequently quoted saying and see if there is any substance in it.
The idea behind the saying is that investors are better off selling out of equities in May and buying back in November. As evidence-based investors, we are all about the data. So, if science is behind this claim, we are all in. Unfortunately, there isn’t.
I’m not a historian, but the saying seems to trace back centuries to a time when traders would literally go away for those summer months, causing market liquidity to dry up. However, the saying gained prominence in modern times as investors noticed higher stock market returns historically from November to May than from May to November.
We looked at the data for the last 35 years, and sure enough, the S&P 500’s returns are higher in the colder months than the warmer months (at least from our Northern Hemisphere perspective). The average returns from the six months beginning in November are 7.7% compared to an average of 3.4% beginning in May.
However, a relationship like this, while quantitative, is not necessarily science. A scan of the data shows it is skewed heavily by a few years, particularly the financial crisis and the dot-com crash. The worst six-month periods of those crises happened in the May to October time frame. Was this destined by the “sell in May and go away curse,” or just coincidence? It is almost certainly the latter.
Here are a few other points to keep in mind:
- The 3.4% achieved from May to October is not bad. In fact, a total bond portfolio’s1 returns during that same time period would have only returned 2.5%. I don’t know about you, but I’d take that extra 0.9% per year all day long.
- Looking at recent history is also telling. Over the past four years, a pure S&P 500 holding would have returned about 16.6% per year. For investors who sold out and invested in bonds from May to October, their return would have been just 8.3%. Buy and hold almost always wins out over ill-conceived market timing.
True evidence-based investing is built on a foundation of science, not data-mined coincidental relationships. Unfortunately, for casual investors, evidence-based investing doesn’t have any catchy phrases to lure them in. We need to work on that. The problem is that no good words rhyme with terms like “Evidence” and “Factors.” How would you finish these phrases in a way that rhymes? “Buy and hold factors…” or “Follow the evidence…” I asked Chat GPT. It returned with “Buy and hold factors, grow assets like tractors.” I’m not sure that is going to do it.
1. Vanguard Total Bond Market Index Inv (VBMFX)
PCE – The Fed’s Preferred Inflation Measure
PCE inflation came in at 2.8%, in line with last month, but higher than the 2.7% that was expected.
Headline of the Week
Bad Wasn’t Too Bad, So It’s Good
The Fed’s preferred measure for inflation capped a tough week for those looking for confirmation that rate cuts are imminent. While the Personal Consumption Expenditures (PCE) report came in higher than expected (bad), the extent of the increase was not as “hot” as many feared (not too bad), and thus stocks rallied, and bond yields declined (good). It is always an entertaining sport to trace the market’s thinking when news hits the wire.
One area that was quickly pushed off the front page (if it was ever there) concerns this week’s Gross Domestic Product (GDP) report and its relationship with inflation’s direction. The US economy’s growth slowed in the first quarter of this year, which is not by itself too alarming given its recent strength. The concern creeps higher when the toxic mix of slower growth with higher inflation presents itself. This mix, otherwise known as “stagflation,” hopefully is a short-term blip in the data. It is not as entertaining to raise troubling economic news.
The reports and their reactions and implications are based on shorter periods. Longer-term there remain many positive aspects about our current environment and the Fed seems to be taking the changing inflation dynamics with a cautious and appropriate stance.
The Week Ahead
Amazon and Apple are reporting earnings this week, but earnings should take a backseat to the Federal Reserve meeting and a jobs report.
Federal Case
- The Federal Reserve meeting isn’t expected to produce a rate cut yet. However, a weaker GDP growth number may weigh on the decision-makers and alter future rate calculus.
- The main focus will be new “dot plots” of future rates and the press conference from the chairman.
- We started the year expecting 1.5% of rate cuts in 2024, and now the market is implying only a 0.35% lower rate in December.
Charting the Path.
- Friday’s non-farm payroll report could finally show cracks in the strong employment story, but it will come after the central bank makes its decision.
- Current expectations are that 210,000 new jobs were created in April, following 303,000 in March.
- While it will come too late for the Federal Reserve meeting, it will shift the prospects for the June meeting.
- The Job Opening and Labor Turnover Survey (JOLTS) report coupled with the ADP employment report earlier in the week may foreshadow the jobs report and possibly impact the Federal Reserve discussions.
- The Purchasing Managers’ ISM numbers will also arrive a little late for the Federal Reserve meeting, but they will be important data points for the next meeting.
The Old World
- A first-quarter Gross Domestic Product (GDP) report from the European Union is also on the calendar.
- Manufacturing in Europe has started to show improvement. Will this increase show in the numbers?
- Germany has been the biggest drag on the block, so improving manufacturing there should help the entire zone.
- The previous quarter was flat, so an expansionary reading will be a welcomed relief.
- A positive read may not be that good for investors as it may take away the urgency for the European Central Bank to begin rate cuts.
Weight Watchers
- Earnings in the coming week will be dominated by heavyweights Apple (AAPL) and Amazon (AMZN), but food-focused names Starbucks (SBUX), McDonald’s (MCD), and Coca-Cola (KO) also report.
- It is a little under the radar, but Novo Nordisk (NVO) and Eli Lilly (LLY) report next week. Both companies are the leading manufacturers of GLP-1 medications Ozempic and Wegovy for Novo and Mounjaro for Eli.
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