To the extent that one is a consumer of financial news services and websites, the first day of May marks the ringing of the bell for advice givers imploring investors to sell all of their equity holdings and retreat to the safety of bonds or cash. Our (expensive!) friends at Ned Davis Research supply a treasure trove of historical data on the subject. For example, since 1950, a $10,000 investment in the S&P 500 index has netted a paltry $1,326 – total - for cumulative investments from May 1 to September 30 of each year.
As hard as that is to believe, consider this: the cumulative gain for holding the same initial investment of $10,000 in the S&P 500 from October 1 to April 30 every year since 1950 is a staggering $1,154,947. In other words, essentially the entire gain in U.S. equities since 1950 has come from only half of the months (October through April) of the year. Based on that compelling historical data, an investor could be forgiven for portfolio hibernation from May to September. Why bother?
Because doing so does not work every year (from 2003 through 2016, there have been just two instances (2008 & 2011) where the S&P 500 Index posted a negative total return from May-October), and there are reasons to hold your selling fire this time around. Without going into too much detail in this short note, suffice it to say that the indicators we lean into lead us to the conclusion that the uptrend in the global stock/bond relationship which asserted itself last year remains intact. To name one data point supporting positive trend evidence, 76% of global equity markets are trading above their respective 50 day moving averages, a sign of intermediate-term strength. Ok, two more - most global manufacturing PMIs (Purchasing Manager Index) are indicating expansion, and the Organization for Economic Co-Operation and Development (OECD) leading global economic indicator continues to strengthen.
Wondering how this “theory” developed? Our friends at First Trust lend some historical context. According to them, when the U.S. was more of an industrialized economy it was not uncommon for plants and factories to close for a month or longer in the summer to retool and allow for employees to vacation. The theory was that companies would conduct less commerce in that six-month span, which would likely translate into lower earnings. Today, due to globalization, the world is far more interconnected and competitive, and there is less room for downtime (in our opinion).
To the portfolio hibernators out there, let’s compare notes in the fall.