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Sell in May and Go Away?

Last update on: Oct 24 2019

Investors who followed the old adage to sell in May and buy again in November missed some nice gains in the last month.

The S&P 500 rose 1.40% for the month of May and is up 8.62% for the year to date. The Dow Jones Industrial Average returned 0.71% for the month and 7.41% so far in 2017.

But the gains were confined to indexes dominated by the larger companies. The Russell 2000 lost 2.03% for May and is up only 1.50% for the calendar year.

Overseas stocks continue to trounce U.S. counterparts. The All-Country World Index gained 2.35% in May and is up 11.06% for 2017. Emerging market equities returned 2.90% for the month and 16.99% for the year to date.

Long-term treasuries bounced back. They rose 2.09% in May (beating several U.S. stock indexes) and now are up 5.14% for 2017. Investment-grade bonds gained 1.43% for the month and 3.88% for the year.

Treasury Inflation-Protected Securities (TIPS) declined 0.02% for May and are up 1.78% for the year. High-yield bonds returned 0.98% for the month and 4.26% for 2017 so far.

The dollar declined 2.07% for May and now is down 5.25% for the year to date.

Energy-based commodities lost 1.66% for the month and 8.96% so far this year. Broader-based commodities also have negative returns, declining 1.08% for May and 5.61% thus far in 2017. Gold was flat for May but still is up 9.14% for the year to date.

While politics and short-term news capture the headlines, for months, the pattern of returns has been consistent with key market data. U.S. stocks are doing well, but not as well as overseas equities, especially emerging markets. Bonds have become more volatile as investors debate whether the long-term interest-rate cycle is turning against them.

Commodities have recovered from the lows of the bear market, but it looks like a new bull market won’t take hold without stronger economic growth or inflation, or both.

As I’ve been saying for some time, there isn’t much of a margin of safety in U.S. stocks and bonds. Overseas stocks and bonds have a greater margin of safety and more growth potential right now.

The Data

Manufacturing continues its recovery and is contributing to economic growth. The data are volatile from month to month, so it’s a good idea to look at the averages over three or six months. Viewed that way, manufacturing seems to have slowed a little recently, but still is contributing to growth.

Last week’s Durable Goods Orders were a solid example. The key core capital goods segment, which measures basic equipment purchases by businesses, was flat for the month after rising 0.2% the previous month.

Over 12 months, Durable Goods Orders increased 2.9%. That’s faster than gross domestic product (GDP) growth and much better than a year or two ago. The other headline numbers in the report were negative and were inconsistent with other recent manufacturing reports.

The Kansas City Fed Manufacturing Index rose to 8 from 7, indicating continued solid growth in this region that was hit hard by the commodity bear market. Most components of the index were strong.

The Dallas Fed Manufacturing Index had another significant increase and recorded its seventh consecutive month of strength in the region.

The Chicago PMI registered a strong increase to 59.4 from 58.3 after three months of little change. This is the highest reading in two and one half years.

The other manufacturing surveys reported strong, but steady, growth. The PMI Manufacturing Index dropped 0.1 to 52.7. This survey peaked in January and is at an eight-month low. The ISM Manufacturing Index rose 0.1 to 54.9. Most of the details of the ISM survey, however, were very strong.

Consumer Sentiment, as measured by the University of Michigan, rose to 97.1 from April’s 97.0. However, it was down 0.6 from the mid-month flash reading. The expectations component increased while the current conditions component declined a little.

Sentiment remains near the highs for the economic recovery. But sentiment also differs dramatically when measured by political party affiliation and income levels. That’s why high sentiment readings haven’t translated into higher consumer spending.

Consumer Confidence, as measured by The Conference Board, declined to 117.9 from 120.3, but that is still a strong reading. It is the sixth consecutive month above 110 and remains near 20-year highs. On another note, plans to make major purchases declined, which is consistent with modest retail sales increases in recent months.

The second estimate of first-quarter GDP rose 1.2% from 0.7%. This was a higher revision than most expected, but I said when the first estimate was released that the other data for the first quarter indicated growth was higher than that initial estimate.

The strong sentiment and confidence readings aren’t a surprise because consumers did well in April. Personal Income rose 0.4%, and the income and salaries component increased 0.7%. Consumer spending increased 0.4%, and the previous month’s spending was revised to 0.3% from 0.0%. The savings rate also held steady.

Inflation, as measured by the PCE Price Index, continued its recent decline. The headline price index rose 0.2% for the month and 1.7% over 12 months. The core price index rose 0.2% for the month and 1.5% over 12 months.

Home prices are increasing faster than incomes, according to the S&P Corelogic Case-Shiller Home Price Index, which has a two-month lag. Prices increased 0.9% in the latest month and 5.9% over 12 months. The bad news is that home prices can’t continue increasing faster than incomes indefinitely.

Recent home sales haven’t done as well. Home sales started the year strong, but momentum didn’t follow through to the traditional selling season. Pending home sales declined 1.3% for the last month, which was well below expectations.

The ADP Employment Report set high expectations for tomorrow’s Employment Situation reports. ADP reported 253,000 new private sector jobs for the month. But new unemployment claims increased for two consecutive weeks. A modest increase of 1,000 was reported last week and 13,000 this week.

The Markets

The S&P 500 gained another 0.36% for the week ended with Wednesday’s close. The Dow Jones Industrial Average edged up 0.06%. The Russell 2000 declined 0.86%. The All-Country World Index rose 0.26%. Emerging market equities gained 0.05%.

Long-term treasuries added 1.39%. Investment-grade bonds rose 0.56%. Treasury Inflation-Protected Securities (TIPS) were up 0.52%. High-yield bonds appreciated 0.16%.

The dollar lost 0.30%.

Energy-based commodities lost 3.72%. Broader-based commodities lost 2.02%. Gold rose 1.08%.

Bob’s News & Updates

IRAs are among the most valuable assets most people own. That’s why I recently conducted a webinar called IRA Changes & Strategies You MUST Know. It is one of my most popular and important presentations. Find out more here.

You should read my latest book, which is receiving great reviews on Amazon. A recent review said, “Excellent book – highly insightful and informative – highly recommend it.” Learn more about the revised edition of “The New Rules of Retirement.”

Some Reading for You

The U.S. oil industry is disrupting efforts by OPEC and Russia to increase the price of oil, as explained here.

Compare your retirement expectations and readiness to people surveyed by TIAA.

John Hussman, of Hussman Strategic Growth fund, explains the mistakes he made in recent years to tarnish his once-enviable performance record, and why he expects to do well over a full market cycle.

I comment and link to these and other items on my public blog.

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