The language of Wall Street is infused with pithy maxims. “Don’t frown; average down.” “The trend is your friend.” And perhaps most relevant to us at this time of year, “Sell in May; go away.”
The last one is perhaps the most dangerous because, at least for the past several years, it has held true. Since 2010, we’ve had strong first quarters followed volatile, choppy springs and summers.
But it is important to not be fooled by randomness here or, more accurately, be swayed by the recency bias. I’ll never forget a simple study that money manager Ken Fisher published years ago in The Only Three Questions That Count. Using data back to 1926, Fisher calculated the average return of the S&P 500 by month.
What did he find? Well, as it would turn out, May happened to be one of the least profitable months, with an average return of 0.30%, though February, at 0.26%, was lower. The only negative month was September. Interestingly enough, October—which was the month of the 1987 Crash and the 1929 Crash—had an average return of 0.62%.
Yet the summer months of June, July and August were three of the most profitable months of the year, with returns of 1.37%, 1.87%, and 1.25%, respectively. July was actually the most profitable of all months; even December and January, the two months believed by many investors to be the best, were lower at 1.78% and 1.69%, respectively.
My point by now should be clear: “Sell in May, go away” is a losing strategy if you are basing it on seasonality alone. In any given year, there could be legitimate reasons for selling in any particular month, but selling because it is a particular month is sloppy analysis that will lead to sub-par results.
So, what about this year? After the great start we had, I’m not expecting much from the next quarter. And in fact, given that the market has traded sideways since mid-March, you could argue that we are currently in a mild correction.
But any weakness here should be used as an opportunity to put new funds to work. There is never an “ideal” time to invest, but I like to see valuations that are modest and sentiment that is lukewarm at best. Today, both of these conditions are in place.
I’ve recommended income investments such as dividend paying stocks and master limited partnerships as the best way to generate returns in a sideways market. If you haven’t loaded up your portfolio with them yet, do so on any weakness. For “one-stop shops” I continue to like the Vanguard Dividend Appreciation ETF (NYSE:$VIG) for dividend-paying stocks and the JP Morgan Alerian MLP ETN (NYSE:$AMJ) for MLPs. I own both personally and in client accounts.