May 3rd, 2014
by Lance Roberts, Streetalk Live
As we wrap up the month of April we also wrap up the seasonally strong period of the year. As I discussed at the beginning of April:
"The table below, which uses Dr. Robert Shiller's data, shows the monthly statistical data of returns which I will use for the remainder of this missive.
Using the data above, let's take a look at what we might expect for the month of April.
Historically, April is the 4th best performing month for stocks on average yielding an average return of 0.79% and a median return of 1.02%.
Interesting note: as you will notice in the table above and chart below, average returns are heavily skewed by outlier events. For example, while October is considered the "worst month" with an average return of -0.27%, the median return is actually a positive 0.58% which makes it only the 4th worst performing month of the year beating out February [the worst], May and June.)
April, as shown in the chart above, also represents the end of the "seasonally strong" period for stocks. As the markets roll into the early summer months May and June tend to be some of weakest months of the year along with September. This is where the old adage of "Sell In May" is derived from. Of course, while not every summer period has been a dud, history does show that being invested during summer months is a "hit or miss" bet at best as shown in the table to the left (click to expand).
However, before you slip into a warm bath of investment bliss, it is important to remember that just because the data suggests that April will "probably" be a positive return month for the market, there is also the "possibility" it will not. The chart below depicts the number of positive and negative returns for the market by month. With a ratio of 43 losing months to 72 positive one, there is a 37% chance that April could yield a negative return.
Overall, statistically speaking, the data suggests that the markets will break out to new highs in the days ahead which will continue to support the "bullish case" for equities. This is why, as I have reiterated in our weekly missive, that portfolio allocations should remain biased toward equities. To wit:
From a bullish perspective, it would appear that the markets are consolidating the advance from the lows of February which should allow markets to stage another advance into late spring. That analysis would align with both seasonal tendencies and the fact that the Fed is still pushing liquidity into the financial markets presently.
It is for these reasons that we are currently keeping our allocation models aligned with the overall market.
However, one should not extrapolate the potential for April to be a positive month into a long term trend. As I stated previously, May tends to be one of the worst performing months of the year followed by June. As the table shows above the average annual return from the summer months is significantly poorer than the fall and winter. To show the impact of that performance differential I constructed a chart, below, which shows the growth of $10,000 invested in each of the seasonal periods.
While it seems absolutely clear that one should just cash in their portfolio in April and come back in November, there are few that could actually use such an investment discipline. There are plenty of years during the summer where the markets rose, and sometimes quite substantially. There are also plenty of seasonally strong periods hit with exceptionally strong sell-offs as in late 2008 and early 2009.
It is during these periods that investors tend to do the opposite of what they should rendering strategies,such as "Sell In May", effectively useless.
However, with the already weak start to the year, combined with a historical tendency for the markets to have a correction during mid-term election years, this particular summer period likely puts investors at a higher degree of risk. Therefore, while portfolios remain fully exposed at the current time, it is done so with a high degree of caution. Should the markets begin to deteriorate to any significant degree, we will reverse recent actions and raise cash accordingly."
Ironically, everything that I wrote at the beginning of the month remains the same. The only difference is that heading into April we were expecting a rally which failed to materialize. This leaves us little wiggle room for the two of the seasonally weakest months of the year which are rapidly approaching. An elevated caution level is advised.
Have a great weekend.