The old stock market chestnut says sell in May and go away … come back again some other day. In various versions, the “other day” is often November.
There is some statistical basis for it. If you divide the year in half, historically the November-May period has outperformed May-November. This seasonal tendency is one of the more persistent, along with the four year cycle, which says years evenly divisible by four (1972, 1976, 1980…) tend to be the most bullish while those that that leave a half (1974, 1978, 1982…) lean bearish. Putting them together, bearish seasonality yields to bullish in November of those latter half-cycle years.
This could be used to rationalize the bullish action in stocks over the past six months. We were scheduled for a bull market in November 2022. On the other hand, this seasonality is sometimes spectacularly wrong … 2008 being a legendary example. The year 2000 was another noteworthy exception.
I don’t independently track these seasonality patterns, because as noted with most releases, Synthetic Systems fully accounts for them. It did not expect the past six months to be bullish, presumably because it thought other factors outweighed this seasonality episode, but it was wrong. Markets opted to follow the seasonality script.
That seasonality however concludes this month.
There are of course other candidate explanations for the bullish past half year. Corporate buybacks have been very strong. Fed policy is not as tight as interest rate targets alone would suggest. Although QT is ongoing, the Fed’s balance sheet is nevertheless still trillions larger than it was at the beginning of 2020. So your choice of baseline determines whether the balance sheet is tight or expansive … it’s shrunken relative to a year ago but grown (a lot!) relative to three years ago. Which is the right baseline? I’m aware of no way to answer that decisively.
Could it be fiscal policy? Lower interest rates “work” by incentivizing borrowing by making it cheaper, and higher rates by disincentivizing borrowing by making it more expensive. You could argue though that the Federal government has been a price-insensitive borrower through this rate hiking cycle. In which case rate hikes have been less effective than would otherwise be the case.
But corporate borrowing also looms large, and higher rates should affect stock prices by making borrowing to fund buybacks less attractive or at least make (repaying debt) buying back bonds more attractive than buying back stocks. Yet the corporate insiders whose compensation is tied to stock prices and who control buyback activity personally benefit greatly from buybacks, and it’s not a stretch to hypothesize that their personal financial interests are guiding decisions more than corporate financial well being. It’s not at all unusual for corporations to incinerate billions in buybacks and then find themselves strapped, even clamoring for bailouts, afterwards.
Possibly the biggest factor, though, is that we have too much company in our bearish camp. Sentiment has been widely bearish. There are good reasons for it. But that also means a lot of bearish positioning and it’s not possible to outperform when everyone’s on the same side of the trade as you are. As a contrarian-leaning investor, I am uncomfortable when too many people agree with me. Yet running counter to the fundamentals can be foolhardy … they eventually prevail. I just don’t want it to be just after I’ve given up on them…
3 thoughts on “Sell in May?”
the stock market hasn’t done well except for cap weighted indices dominated by a handful of megacaps.
True … very much so.
Of course my post refers to the market as a whole, best represented by cap-weighting. It represents the experience of investors as a whole … each teracap like Apple or Microsoft is the equivalent of a thousand billion-dollar companies collected under one ticker.
Your narrow breath observation is timely nonetheless. Breadth has a tendency to lead the market … it led higher last fall and could well be leading lower now. The soldier companies – the majority of names – have been crushed relative to the generals the past several weeks. MarketWatch reports that the market cap of Apple alone now exceeds that of the entire Russell 2000. Possibly the name recognition effect is leading investors to feel safer in familiar names, regardless of how well justified it may be. Or maybe our economy has just devolved into oligopoly.
Not that the Apples and Microsofts aren’t solid companies … but their stock prices are pretty rich relative to the opportunities available across the world’s stock and bond markets.
Let’s add another bearish omen. Copper prices continue to crash. There’s a loose tendency of stocks to follow, as noted in the Comments under Synthetic Systems Beta. Short term is always dicey, and I wouldn’t put much “stock” in any one of these indicators alone – yield curve, seasonality, breadth, copper – but combined, it’s a case of the stars lining up.