The ‘Sell in May and go Away’ Strategy Backfires so far in 2016

Let me start by making a last call to hear my presentation to the Washington, D.C., chapter of the American Association of Individual Investors (AAII). It will be June 18 at the Richard J. Ernst Community Cultural Center on the Annandale campus of Northern Virginia Community College, 8333 Little River Turnpike, Annandale, Virginia. Registration begins at 9:00 a.m. and the program starts at 9:30 a.m. The price of admission is $35, if you pay by June 14, or $40 afterwards. Check out the details.

This week, I did a podcast for the second edition of “The New Rules of Retirement” with Stan “the Annuity Man” Haithcock. It is available on the annuities.direct website. Stan has many great things to say about the book. After listening to the podcast, you’ll want to order your copy of the book today.

The old Wall Street adage is “Sell in May, and go away.” Longtime readers know that I don’t like many adages and rules of thumb. Most of the time they aren’t supported by the data. Let’s take a look at how you would have done so far by following this adage in 2016.

The S&P 500 returned 1.70% for May. The Dow Jones Industrial Average returned only 0.38%. The Russell 2000 gained 2.24%. The All-Country World Index rose 0.33%. But the currency-hedged All-Country World Index lost 1.04%. This means the dollar gained value during the month. Emerging market equities lost 3.69% in May.

Also in May, long-term treasuries returned 0.81%, Treasury Inflation-Protected Securities (TIPS) lost 0.64%, investment-grade bonds slid 0.51% and high-yield bonds gained a modest 0.17%.

Energy-based commodities gained 1.31% in May, with broader-based commodities losing 0.59%. Gold dipped 6.09% in May, bringing the precious metal’s year-to-date gain down to 14.56%. At one point, gold had gained more than 20% for the year.

You can see that U.S. stock investors would have given up some gains by selling at the start of May. Many investors did just that, according to reported cash flows for mutual funds and exchange-traded funds (ETFs). Investors were scared by reports of a slowing economy and a poor earnings season.

I suspect the reason U.S. stocks and the dollar rose in the face of the negative news is that the markets tend to be forward-looking. Slower economic growth and lower earnings were old news and already reflected in stock prices.

The investors who bought stocks could see that some of the headwinds were fading. The dollar lost value so far in 2016, though it made up some ground during May. The steep decline in manufacturing was ending. Commodity prices were recovering and many overseas economies were doing better than in 2015. Combine these with increases in household spending and positive data from the housing market, and forward-looking investors have reasons to be more optimistic about stocks than a few months ago.

The Data

A lot of economic data was released in the last week.

Manufacturing for the most part showed again that the steep decline is over and it is searching for the bottom. The exception was the Dallas Fed Manufacturing Survey. The Dallas Fed region is one of the two hardest hit by declining energy prices. Last month’s survey was the first positive one in more than 12 months. But this month, the survey delivered a significantly negative number. The only positive in the survey was higher wages.

The PMI Manufacturing Index barely changed from last month and continues to register negligible growth. The Production component of the index, however, showed a contraction for the first time in six and a half years.

The ISM Manufacturing Index rose a half point to 51.3. Any reading above 50 indicates growth. This index has been the most positive of the manufacturing readings since the peak in manufacturing a couple of years ago. The Chicago PMI Index, on the other hand, slipped below 50 to 49.3 and was down 1.1 points. This report includes both manufacturing and non-manufacturing companies.

The consumer outlook still is positive, though less so than a month ago. Consumer Confidence, as measured by The Conference Board, declined a bit. Yet, it still is in the same range it has been in for the last 12 months and had a number of positive components. Consumer Sentiment, as measured by the University of Michigan, also declined a bit, but this was after a surge the previous month. It remains near its highest level of the last 12 months.

The positive consumer outlook is supported by the Personal Income and Outlays report. Consumer spending rose a hefty 1% for the month, and Personal Income increased 0.4%. That was the largest monthly increase in spending since August 2009. Despite the increase in spending, inflation, as measured by the PCE index, still is below the Fed’s target.

The S&P Case Shiller House Price Index was consistent with other recent housing data. House prices rose a significant 0.9% for the month and are up 5.4% for 12 months. Increases occurred in 19 of the 20 cities included in the report.

The second estimate of gross domestic product (GDP) for the first quarter increased a bit. I don’t pay much attention to the report, since it is backward-looking and subject to more revisions.

The Fed’s Beige Book on the economy downgraded economic strength a bit. While the Fed says the economy is growing, the growth is only modest. In recent reports, the Fed said growth was modest to moderate. The Beige Book did say that wages are rising in most areas of the country because of tight labor markets.

Tomorrow, June 3, the Department of Labor will issue its Employment Situation reports. The other data issued this week indicate the reports will be similar to last month’s with decent but not exceptional job growth. New unemployment claims declined by 1,000, keeping the number near historic lows. The ADP Employment Report reported 173,000 new private sector jobs were created. That’s in line with expectations, and last month’s new jobs reported by ADP were revised higher by 10,000.

Longtime readers know that, while the media and traders focus on the monthly Labor Department reports, I don’t find them useful. The reports are based on two surveys that can contradict each other on some points. Also, the factors in the reports tend to be lagging economic indicators. More reliable and timely data exist about the economy in other reports.

The Markets

For the week ended with Wednesday’s close, the S&P 500 gained 0.47%, while the Dow Jones Industrial Average lost 0.31%. The Russell 2000 outdid both with a 1.92% gain. The All-Country World Index edged 0.19% higher and the emerging market stocks gained 0.70%.

Long-term treasury bonds had a good week, gaining 1.02%. Investment-grade bonds returned 0.46%, while Treasury Inflation-Protected Securities (TIPS) lost 0.14% and high-yield bonds slid 0.06%.

The dollar gained a fraction for the week, as energy-based commodities rose 0.39%, broad-based commodities returned 1.19% and gold lost 1.02%.

Some Reading for You

This post makes the case that, after a long flat spell, stock indexes might be ready to surge higher.

This article explains the different ways that technology start-ups lie to investors and what motivates them.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

P.S. I invite you to check out the redesigned Retirement Watch website, www.retirementwatch.com. We recently emailed you a username and a password, so look at that email to help you access the new website, which offers upgrades such as a stock market chart on each page, the current recommendations for every Retirement Watch portfolio, a special report section, an archive of past newsletters and issues of Bob’s Journal. Here are basic instructions: go to www.retirementwatch.com and click the Log In button in the upper right hand corner of the page. Your username and password will be different than they were on the old site, so please use the ones we emailed you.