23 May 2016
Selling in May Not a Great Strategy for Long-Term Investors
It can be difficult to remain disciplined—it’s often at times like these when investors get impatient and reach for return by increasing risk, or conversely throw up their hands and get out of the market. Our perspective on stocks remains “neutral”, which means we suggest investors stick to long-term allocations, taking advantage of volatility for rebalancing purposes.
Business optimism remains dim
On the manufacturing side of the U.S. economy, we continue to flirt with a recession, with Industrial Production falling again last month and the Institute for Supply Management (ISM) Manufacturing Index slipping back to near the dividing line between contraction and expansion.
But positively, the much larger service side of the economy continues to hold up fairly well;, with the ISM Non-Manufacturing Index rising to 55.7 from 54.5 and the forward looking new orders component moving to a relatively robust 59.9. The labor market also continues to improve; but as we’ve noted in recent notes, the rate of improvement is likely to slow—the lower the unemployment rate, the fewer people there are to hire. The latest employment report showed that 160,000 jobs were added and the unemployment rate stayed steady at 5.0%. Wages appear to be gaining some momentum as average hourly earnings were up 2.5% on a year-over-year basis according to the U.S. Department of Labor.
Fed seems stuck
The Federal Reserve has been trying to get that ball rolling since the financial crisis through some extraordinary measures, with some success. The economy has recovered, employment has improved, housing has bounced back, and asset prices have appreciated. But the economy is still not firing on all cylinders. After keeping interest rates at effectively zero since 2008, the Fed is looking to move rates to a more “normal” level. There remains a risk of the Fed moving too quickly, but there are also risks to staying too low for too long---leaving the Fed in a difficult position as we head toward the next Federal Open Market Committee (FOMC) meeting in June. As has been the case over the past couple of years, we expect economic activity to pick up in the second quarter from the weak first quarter, but whether it will be enough to allow the Fed to raise rates again, it’s too soon to tell.
And then there were two
A lessening of the regulatory burden and/or getting a hefty dose of fundamental tax return would certainly help; but both are highly unlikely in advance of the November election. After months of debates, primaries, diners, town halls, tweets, etc., we are down to the two presumptive candidates who will square off in November. So what does it mean for the market? Typically the market doesn’t pay a lot of attention to elections until we get into the fall, but this is anything but a typical election year. We expect some increased election-related volatility, with rhetoric and passions running high.
Sell in May and go away?
On top of both corporate caution and political concerns, investors may be wondering if they should “sell in May and go away” given the historical tendency of stock market returns to be -lower during the May through October period. In recent years, pullbacks in global stocks during the summer have taken place in five of the past eight years: 2008, 2010, 2011, 2012, and 2015, as measured by the MSCI ACWI Index. But four of those five periods amounted to mere volatility as stocks rebounded several months later. Only the 2008 losses were sustained given the global financial crisis and recession. Barring a recession, any weakness during this period is likely to be contained.
The declines of more than 10% in the global stocks measured by the MSCI ACWI Index that took place last fall and again early this year coincided with spikes in Google searches for the phrase “global recession,” as you can see in the Google Trends chart below. The recent spikes in search interest are minor compared with the anxiety reflected at the peak of the global recession and financial crisis in 2008 and 2009. However, they were similar to those seen during the 2011 European debt crisis. The pickup in market volatility seems to have some investors concerned about prospects for a global recession and an accompanying prolonged bear market.
Uncertainty among investors and companies has resulted in equities failing to push to new highs…for now. We remain fairly confident that stocks will reach new records, but patience in the near term is required. And selling in May doesn’t appear to be a great strategy for long-term investors as global yield curves are indicating low odds of a global recession. Perhaps hold in May is more apt. Bouts of volatility are likely to persist in light of uncertainty over Fed policy and the upcoming election.
This material is issued by Charles Schwab, Hong Kong, Ltd. The information provided here is for general informational purposes only and has not been reviewed by the Securities and Futures Commission in Hong Kong.