Sell In May?

Benjamin Haas |


April was a difficult month for a lot of investments as investors are still seeing broad losses in both stocks and bonds. Usually it’s “sell in May and go away” which is an old strategy to avoid what historically are more volatile months between May and November, but short-term traders would have been lucky to sell in April this time around for as bad as it was. Inflation, a slowing economy, higher yields, and geopolitical worries – they are all hurting stocks and bonds.

To be clear, we would never advocate for trying to time the market. But even for a long-term investor like me, these short-term losses can feel a bit unnerving. Even I need to remind myself of why we diversify and focus on the positive things we see happening, and not just the negative.

If you’re absolutely fine to trust the process and you’re not stressed by these short-term movements, turn this off. We feel okay and when we make some minor changes in the next couple days or weeks, we’ll let you know as always.

If you want to get deeper in the weeds with us, I welcome that and am going to put on my Optimist hat and share 7 notes from us and from LPL’s Research team that I think are helpful to share, even if they get a little technical.

  1. EARNINGS: For starters, earnings season has been quite strong. Companies have to report how they are doing every quarter which when you put it all together, paints a picture that, of course, drives stock prices. Corporate balance sheets are healthy, and the consumer is strong, all suggesting there may not be a recession in 2022. Time will tell, but there are two sides to every coin and I believe if businesses and consumer are strong, that will move the market north again.
  2. EXPECTATIONS: What can drive the market though are expectations on those earnings. We EXPECT Amazon to make money. We EXPECT energy companies to do better when we’re paying $4.50/gallon. We EXPECT people to still be watching Netflix. Just because Amazon didn’t meet expectations for one quarter, doesn’t make it a bad company…but it does move the market in the short-term. And big companies like Amazon, and Apple and Google are disproportionately represented in some of these market indices, so when they look bad, it’s certainly a noticeable drag on indexes like the S&P 500.
  3. SENTIMENT: Speaking of expectations, SENTIMENT is near historical levels of pessimism, a good thing from a contrarian point of view. Sentiment is maybe best represented by Warren Buffet’s age-old advice to “be fearful when others are greedy, and greedy when others are fearful.” As the markets try to climb a wall of worry right now, it may be a good time to have that Buffet-contrarian view.
  4. Data, data, data. Data came out last week showing that the economy slowed in Q1. The market (and you?) probably already knew that was the case. We were all aware of the Omicron Covid-19 variant and the drag on the economy that was trade and supply chain issues – it was all over the headlines so this in some ways feels like old news. The key counterpoint is that underlying demand from both consumers and businesses were strong. That’s seen in a data point called “Real final sales” which rose an annualized 2.6%, up from 1.7% in Q4. Momentum in April could mean that growth will continue, and the idea of recession won’t become reality.
  5. INFLATION. It’s here, we all see it, we all feel it. It’s why the Federal Reserve will increase rates again this week. But should inflation peak soon (which LPL feels is the case), that could be a major driver for equity returns later this year. The 10-year treasury reaching 3% has been thought to be a potential peak, and we are just about there.
  6. MARKET MOVES. This is one of the worst starts to a year ever for stocks, with the S&P 500 down 13.9% from peak earlier in January. The catch is since 1980 the average intra-year correction is 14.0%. So, while this feels like a few gut punches in the moment, this is normal. Very normal. Incredibly, 12 of the past 21 times (since 1980) the S&P 500 corrected at least double digits, it managed to finish the year positive.
  7. SELL IN MAY. I’ll end by circling all the way back to the age-old question, “should I sell in May and go away?” Well, history shows that the market climbs only 1.8% on average between the months of May and October, versus the best six months (November – April) up 7.1%. But recent history tells a different story. Had you “sold in May and gone away” in 9 of the last 10 years, you would have missed out! We shouldn’t fall into any biases as investors because anyone can make a positive or negative argument, depending on how they carve up the data!

So, what’s the moral of the story? What should we do? We don’t time the market. But we DO consider rebalancing your portfolios when these swings happen. And we DO look for opportunity where certain investment could be exchanged for others who may be better positioned for the rebound, whenever that occurs.

Remember, you’ve been here before. 14% swings are the average in any given year. Trust the plan, try to be opportunistic when you can, and if you’re feeling a little queasy, call us!


Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.

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