Home » Money » Buy in May, Let it Play?

Buy in May, Let it Play?

It’s May Day, and it’s more than the traditional first day of (real) Spring and the worker’s holiday.  It’s also the day that the old stock market adage “Sell in May and go away” kicks in.  Why is that?  It’s hard to say exactly why, but Wall Street traditionally takes a long summer break.  The S&P 500 since 1928 has risen on average 1.83% from May to October, but 4.98% from November through April.  The summer is also a period of high volatility and danger, so smart investors often skip the warm seasons.

Not this year.  The huge rise of 9.3% in the S&P 500 so far in 2013 might be enough to scare some people into profit-taking, getting out while the getting is good, but many advisers say you should stay in this year.  That includes Nouriel Roubini, better known as Dr. Doom, the New York University Econ prof who famously predicted the housing crash.  The faith in the stock market is impressive, but is it realistic?

gonefishingIt’s probably best to let Roubini do the explaining, since he is famous as a bear.  “They are creating massive fraud,” Roubini said during a panel at the Milken Institute Global Conference in Los Angeles, Calif. Monday.   “At some point, there’s a levitational problem.”   His beef is with the Federal Reserve, which is still committed to low interest rates and even further stimulus if needed.  The rise of corporate junk bonds is given as an example of an inflating bubble that is doomed to pop – but not before it rises substantially.  He gives it two years before what he calls a “Depression” sets in (and he obviously doesn’t think we’re in one now).

But the big bogeyman in markets is still Europe, and most investors who are looking for some place to put their money are gathering a lot of faith in the US, bubble or now.  Noting that the old adage doesn’t hold true when there’s a bullish start to the year, Sam Stovall, chief investment strategist at Capital IQ, rallied his clients on Monday. “History says, but does not guarantee, that this May could fare better than most.  Catalysts remain central bank liquidity and the lack of alternatives in a period of rising concern over global economic growth.”

Then again, the net return on the S&P 500 over the last 13 years has been a paltry 6.7% – an annualized rate of 0.5%.  Ouch!  This includes a big crash in 2001 that led to a peak at about the same level in 2008, another crash, and the peak hit this year.  Those of us who take the long view and see this as a secular bear market have to admit that this period has been especially bearish by historical standards – and might be due for a little bit of return almost out of pity.

So no one is particularly bullish overall, and everyone sees risk – either in the future or in Europe or both.  But the strong rise earlier this year has everyone looking for more.  The reason is that corporate profits are underpinning this market move in a way that no one has seen for a sold 5 years.

Is anyone advising that investors walk away from this market, given the high risks of staying in and the profits to be had by selling high?  Very few are advising it at this stage, which is one of the main reasons that gold is plummeting.  There is faith rising in the US, particularly in the stock market, and it’s proving pretty solid.  Faith, at least on Wall Street, is measured in dollars – and so far there this year there is a lot of faith to go around.

Since its inception in 2007 Barataria has always shied away from making stock predictions for one simple reason – the market has been low performing and full of risk the whole time.  And I don’t want to be sued for lousy advice.  That’s two reasons, then.  But this time one of the solid foundations of the predictions for 2013 has been a rise in corporate profits that will, given time, lift employment at big corporations and keep general feelings running high.  That does point to a continued rise through the summer, adages be damned.

So this may be the year that you can still buy in May and let it play.  But if you do, please say you go the advice from Dr. Doom.  He has a better nickname than I do, anyway.  And a much more interesting reason why.

12 thoughts on “Buy in May, Let it Play?

  1. Stocks are way over-valued. If Roubini was a trader he would know that you can never time the market. Take profits now and don’t play with money you can’t afford to lose.

    • I’ll go with the last part, but I do think this run has a lot more steam in it. Then again, this is the third time the S&P has been at this level in 13 years, and the last two ended rather badly.

    • I thought you would like that. 🙂 It is a strange reason, isn’t it? Besides, how long has it been since the place wasn’t rigged?

  2. I’m with everyone else here. Saying its rigged and that’s a reason to play it is a very bad argument.

    • It very much is. I think I’m the only person who found this funny, at least in a dark way. On the face of it, this advice seems pretty twisted.

  3. I can’t help but comment on numbers, in particular your use of 13 years. There are two components here. First, this seems like cherry-picking to stun rather than provide a balanced, though less dramatic point. With two recessions packed in that time frame, the peak of a bubble or the nadir after shouldn’t be considered representative. A more spectacular point for the conclusion that the market is fabulous could be made using a four-year range – the S&P was less than half in March of 2009 of where it is today (676 vs 1614). Try 20, 25 or 50 years. You are certainly right about market timing. Investors lose money because they follow like sheep — buying near the top and selling to salvage an investment they’ve already lost money on.

    The second component is comparing the number of an index alone. It is incomplete data. Any reasonable investor factors dividends into the equation. In an era of abysmal interest rates, holding onto equities with a 3% or better dividend yield is a smarter place to keep your money. More so since corporate boards are loathe to reduce dividends. Stock appreciation is just a cherry on top.

    • I’ll take these in reverse order. Using the S&P500 by itself was a bit dubious, and you are correct that this excludes dividends. A true index fund would include them, so that was a mistake. The return is a bit higher than listed.

      As for starting from the peak in 2000, there is a very good reason to to this. We are in a secular bear market, which is a long term trend. Within this trend there are cyclical peaks and valleys, but the overall trend remains more or less intact. When did the trend start? At the inflection point, which is going to be a peak. It’s well explained here using DJIA charts not S&P500, but the results are about the same http://seekingalpha.com/article/1102171-where-are-we-in-the-secular-bear-market

      This aligns very well with the way the overall economy has been moving since that time, and the market has been reflecting a definite contraction in the private economy over the last 13 years. We’ve talked about that many times here, particular with regard to K-Waves or longer economic cycles.

      • “The return is a bit higher than listed.”
        I am not sure how a few percentage a year yield is only a “bit higher” than half a percent. Yes, if you go with the “buy low and sell high” view and ignore the rest, the dividends (a couple percent) do seem more like noise than part of the bigger picture, but I think the opposite is true. After all, what is an equity’s price — a consensus of worth. Something you’ve written about regarding money. But review the math. If an investor buys and holds with no stock appreciation, and that stock receives a three percent yield, a $30 equity compounds to a $44 return in your 13 year time frame.

        The explication of a “secular bear market” in your link seems thin at best. Once again, it refers exclusively to an index without correction for dividends, and none of these indexes account for inflation. Worse, the author endorses a market timing strategy in this environment. If bubbles and the last recession have taught us anything, “the trend is your friend” thinking is a great way to buy high and sell it all to pay the mortgage after the market has collapsed, the factory closed and you’re looking for a job.

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