Thursday, May 3, 2018
Those of you who read our periodically-published market commentary know I am a Dr. Seuss fan and tend to work “Seussisms” into my commentary. When thinking about the old stock market axiom “Sell in May and Go Away,” I thought it had Seuss ring to it.
The Sell in May and Go Away mantra suggests an investor should cash out during this time of the year because the May to November time frame is typically plagued by lackluster returns in the capital markets. September holds the record as being the worst month from a market profitability perspective; but because some of the more significant sell-off’s have occurred in October, that month stands out in investors’ minds as a particularly risky month. After a benign 2017, the volatility of the last three months has once again reminded us that investing in the capital markets is not a risk-free venture. But it still looks to be a favorable time to be a stock investor.
Yesterday the Federal Reserve chose to leave interest rates unchanged. I am hopeful that will help stabilize bonds, bond funds and even some of our hybrid funds, which invest in both bonds and stocks. My research indicates, ironically, that most of the downward pressure on portfolio returns YTD have come from our more conservative investments. Sure, our stocks are fluctuating and some are just barely “in the green,” but on the whole they are simply giving back the profits earned since the end of last year.
See the S&P 500 in Chart 1 here. There are two things I wish to call to your attention in this chart which spans from November 1, 2017 through today. First, notice the chart is forming a triangle. The market is consolidating because it is conflicted at the moment. It does not have the “oomph” to rise even though earnings are very favorable; but despite some pretty awful headlines it also seems to be holding above that reaction low from Febraury 9th of this year.
The second thing I would like to call to your attention in Chart 1 is that today’s market valuation is no worse than where we were at the end of November. We’ve lost some time here – about six months – but remember, you are not investing for six month periods; you are investing for much longer timeframes. Also important is that even after the recent volatility the S&P is still considerably higher than where it was, say, 18 months ago, in January 2017. When it comes to investing, time is your friend.
Of all the market barometers we follow, some carry more weight than others. One very important barometer, The Dow Theory, is currently flashing warning signs. The Dow Theory is relatively simple. Think of the companies that make up the Dow Industrials; 3M, Apple, Coke, Proctor and Gamble, Pfizer, etc. These are the companies that make the “stuff” you and I consume daily. Then think of the Dow Transportation Index; companies like CSX Railroad, FedEx, JB Hunt Trucking, etc. These are the companies that deliver the “stuff” made by the industrials.
When both the Industrials and Tranny’s are doing well, it suggests the market is healthy. When they are not, investor beware.
There have been times in the past – most recently the fall of 2015 – when Dow Theory flashed a pretty serious warning but because of extenuating circumstances we chose to ignore the sell signal. We are on a similar path today. We believe there is a lot of pent-up energy that will be released soon causing the market to move above or below one of the two blue lines that form the triangle in Chart 1. The odds favor the energy being released to the upside because profits are so strong right now.
I don’t believe Dr. Seuss would write a book about markets dropping while profits were skyrocketing…or would he? Maybe he’d call it something like “You Say Good Stock, I Say That’s a Crock!”
We just don’t think so; therefore, as of today we are not Selling in May and Going Away!