‘Sell in May and go away’ is an old stock market axiom based on how stocks perform seasonally. Overall, stocks tend to do better in the months of November through April than they do in the months of May through October. Hence some investors sell out of stocks in May and wait until later in the year to reinvest. However, that strategy has worked in only 2 of the last 8 years and I don’t believe it will work in 2017. Over the last 8 years the equity markets haven’t gone up much between May and October, but they didn’t go down much either. Trying to time the market is an almost impossible task, as you have to be right two-times, once when you sell and then again when you buy back in.
My analysis suggests a better strategy is not to “sell in May” but rather to “rotate in May”. By that I mean rotating the equities in your portfolio out of more aggressive sectors like industrials and financials, and into more defensive sectors like utilities and consumer staples (think cereal, toothpaste, toilet paper) for the next few months.
The other reason I continue to favor stocks over bonds is that I believe we are in a transition from an interest rate-driven market to a corporate earnings-driven market.
The following chart shows corporate earnings in orange (as measured by Earnings Per Share or EPS) and the S&P 500 Index in blue, over the last 10 years. You can see how earnings started to decline in 2007, while equities continued to go up. Stocks finally started to decline in early 2008. Both earnings and the S&P dropped precipitiously until early 2009. While earnings rebounded quickly starting in 2010, the S&P had a more gradual climb upwards. This trend, mostly driven by declining interest rates and monetary stimulus from the Federal Reserve, continued until late 2014. Earnings started to decline in late 2014, which led to 2 abrupt pullbacks in stocks in October 2015 and early 2016. Much of this decline in earnings was driven by the collapse in oil prices and the residual effects that had across related companies and industries. When the price of oil stabilized in 2016, you can see earning level off. The chart clearly shows that corporate earnings tend to lead the S&P in direction, whether going up or down.
Corporate earnings are now in strong uptrend. Perhaps most importantly, the percentage of companies raising earnings guidance, versus companies lowering guidance, has flipped positive for the first time in the last three quarters and only the second time since the 1st quarter of 2011. Companies tend to be very conservative when publishing their future earnings guidance. The fact that more companies are increasing the future earnings estimates is telling.
As the NBA playoffs are underway I will use a basketball analogy for my outlook for stocks. I believe we are in the 3rd quarter of the game, with interest rates being increased due to improving economic conditions coupled with rising corporate earnings. This is generally a positive environment for stock gains. I anticipate this will continue for another 12-18 months.
On the economic front, the initial reading on 1st quarter 2017 gross domestic product (GDP) was quite weak at only 0.7%. However, the 1st quarter GDP each year tends to be low due to difficulty in calculating for seasonality and the impact of winter weather. There were some positives and some negatives inside the report. The one that stuck out to me was an increase in Business Investment of 9.4%, the most in years. Generally businesses don’t invest unless they feel confident that their investment will generate positive results. My outlook is for US economic growth to continue to remain positive in the 2 – 2.5% range for the balance of this year.
May Calendar of Events (comments and additions for future months are always welcome)
- May is National Mental Health awareness month. Nearly 44 million American adults, and millions of children, experience mental health conditions each year. Let’s all get educated on this issue and work towards acceptance and inclusion of people dealing with mental health issues.
May 5th Cinco De Mayo – stay thirsty my friends
May 14th Mother’s Day – wishing all mom’s, grandmothers, and great grandmothers a wonderful day.
May 23rd My daughter Caryn’s birthday
May 29th Memorial Day – let’s remember and give thanks to all who served our country
I hope you find this report useful. Please share it with anyone who you feel would benefit from the information.
Sources: Raymond James & Associates, Macrotrends.net, CNBC.com