Don’t Sell In May; Don’t Go Away
Tax cut proposals took over the headlines this week. Simply putting them on the agenda sparked back-to-back market rallies that pushed the market averages ahead for April. It seems doubtful that major changes in our tax laws can take place before Congress leaves for summer recess, a reminder that the merry month of May will arrive first, reviving another Wall Street cliché, “Sell in May and go away.”
Like all attempts to reduce short-term stock trading to a simple slogan, it doesn’t work although it is a reminder that the stock markets often also have summer slowdowns. The expression comes from an old English saying, “Sell in May, go away, and come back on St. Leger’s Day.” This provided an excuse for bankers to escape London during the summer, returning in September for the St. Leger’s Stakes, the last horse race of Britain’s Triple Crown.
If tested for the last seven years after the Financial Crisis shuffled the markets, selling in May failed in five. Speculators looking for market timing signals would be better off betting the upcoming Kentucky Derby with contenders Always Dreaming at 5/1 and Fast and Accurate at 66/1.
Rather than trying to time buys and sells, investors should try to find well-run companies in growing sectors. Changes in weighting of the stock sectors in the S&P average of 500 stocks provide direction. In 1990, Energy, Industrials, Materials, Utilities and Telecom made up 13%, 15%, 8%, 6% and 9% of the index, a total of 51%. Now, they are 7%, 10%, 3%, 3% and 2%, totaling 25%.
There was more balance back then with no sector making up more than 15% of the index and none less than 6%. Today, the three largest sectors combine for 51% and the three smallest combine for only 9%. The dominant three sectors today are Technology with 20%, Financials with 16% and Health Care at 15%.
Clearly, technology is power, with financial and health care companies using it to expand their horizons. The Era of Technology is replacing the Era of Materials. Flows of information are now democratized tools with printed encyclopedias replaced with crowd sourced Wikipedia and newspapers with Google and Facebook. In 1990, the Dow Jones Industrial Average included American Can, Swift, Sears, Union Carbide, U.S. Steel and Woolworth. New technologies also killed Tower Records, Blockbuster, Polaroid, RadioShack, Eastman Kodak and countless others.
The CEO of Cisco Systems, John Chambers, has predicted that a third of today’s companies will join these in 10 years, survived by those that can reshape themselves into digital technology-focused businesses.
Amazon (AMZN-$919) is reshaping retail. Uber is upturning taxis, Airbub hotels and forward-looking banks like JPMorgan Chase (JPM-$$87) forcing out laggards. The ten largest companies by market cap, a group traditionally dominated by big oil companies, now includes six technology companies, led by Apple (AAPL-$143), which only joined the S&P 500 in 1982.
Technology has become the central core of investor success. Stock investors will always need to try to search through short-term frothy publicity for long-term value. With the market averages again testing record levels, reported and forecast earnings demand attention. Even though the overall economy has still not resumed its pre-Crisis vigor, current earnings reports are encouraging,
With almost a third of the S&P 500 having reported first-quarter results, 78% have beaten profit estimates. These include Bank of America (BAC-$23), which is a new buy recommendation. The Bank survived the Darwinian weeding out of the Financial Crisis and is embracing new technology. Earnings are on track for a 20% increase this year while the Price/Earnings ratio is a reasonable 15 and its 1.5% dividend yield is on the way up.
Jack Bogle, Vanguard Group founder, with 66 years stock market experience, sees attractive stock returns over the next few years although perhaps less than the 11% average rise over his career. He advocates disciplined investing, avoiding the elations of bull markets and the fears of bear markets, Mr. Bogle says not to get caught up in the short-term ups and downs of the market. If you can do that, he says, you don’t even need to open your stock statements until you retire, when he recommends having a cardiologist standing by to help with the shock of seeing how much money you have.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622
