“Sell in May and leave” could be the best strategy this year

Text size

A trader on the New York Stock Exchange.

Michael M. Santiago/Getty Images

This could be the year to follow the adage: sell in May and go.

It was a pretty lousy week shortened by the holidays. the


fell 2.1%. the

Nasdaq Compound

fell 2.6%. the

Dow Jones Industrial Average

was the relative winner, slipping just 0.8%.

The reasons are quite simple. War, inflation, disease and the Federal Reserve’s new determination to rein in rising prices are increasing uncertainty and undermining investor confidence. It’s a lot to digest. Maybe it’s best to give up, for a while.

“Markets discount three things. Earnings and rates, of course. But the third is the belief of those inputs,” says Nicholas Colas, co-founder of DataTrek. “That’s a fancy way of saying [the] markets hate uncertainty.

“We already have a lot of uncertainties,” adds Colas. “But can we really know if the 10 years [yield] stops at 3% or goes to 4%? Nobody knows. Not investors, not the Fed.

Bond yields are up because the central bank has pledged to curb inflation by raising interest rates.

The Fed makes hawkish statements from time to time, but its tone is now very different than in recent years, says Brian Rauscher, head of global portfolio strategy and asset allocation at Fundstrat. “I know that’s too simplistic, but don’t fight the Fed,” Rauscher told clients on a conference call last week. In other words, if the central bank says it is determined to slow the economy, believe it.

Hawkishness is not good news for stocks. “We’re going to have a tough spring and summer,” says Stifel market strategist Barry Bannister. It looks at everything from purchasing managers’ indexes to real bond yields, retail sales and more, and they’re all “saying the same thing”: there’s trouble ahead.

This trio of market veterans is like a Greek chorus of bad news. But they could well be right. As the Fed tightens, investors should use seasonality to their advantage and watch the drama this summer.

The market, in all likelihood, will be down in the first four months of the year. Since 1980, when the market was down until April, it has fallen from early May to September six out of 15 times, or 40% of the time. The average movement from May to September over these 15 years is minus 1.5%.

When the market rises at the beginning of the year, it falls from May to September 23% of the time. Not so bad. And the average gain over this period is 8%.

This story means investors don’t lose much by going conservative in a year like this.

Of course, investors don’t just go for the cash and take an extended vacation. Most of the time, they modify their portfolios at the margin. Concretely, this means reducing exposure a bit or moving to more defensive positions.

Both Bannister and Rauscher like the healthcare sector as an option for nervous investors. Taking healthcare and reducing riskier exposure to industrial and commodity stocks seems like a prudent way to weather the turmoil of 2021.

Write to Al Root at [email protected]

Comments are closed.