Large-cap stocks started May near all-time highs after a choppy April — seemingly a perfect recipe for “sell in May and go away” to take hold. Yet, like many tired old cliches, “sell in May” may very well be one to avoid … or at least delay.
April’s lackluster performance (the S&P 500 Index finished less than 1% higher) can’t be blamed on earnings, as first-quarter results came in stronger than expected. As of the first week of May, 74% of the 371 S&P 500 companies that had reported earnings came in above analyst expectations, while 52% reported better-than-expected revenues. The real surprise for the quarter was fact that earnings growth remained positive (so far) at 1.5% — contradicting Wall Street’s expectations of flat earnings.
Still, the market feels sluggish as we trudge through one of the more well-known seasonality periods of the year. The phrase “sell in May and go away” has surfaced and made the rounds.
But is it sage wisdom or simply balderdash? As always, we look at the data to decide.
The table above displays the average performance of the S&P 500, by month, dating back to 1990. According to the market’s history, May returns an average performance of 1% since 1990. What’s better is that the month has been positive 65% of the time. Meanwhile, June is the ugly bug, averaging -0.6% returns, and putting up positive results only 52% of the time.
Translation: May’s not actually as bad for stocks as you might have heard. And June is worse.
While the historical data over the last 23 years is supportive of some strength for stocks in May, more recent history has seen the month subjected to a lot of “headline risk.”
Over the last four years, May has had an uncanny knack for delivering global events that have resulted in selling pressure for stocks. You had the eurozone debt crisis in 2010, the Portugal/Greece crisis in 2011, fears of Greece exiting the eurozone in 2012, then Fed taper fears in 2013. This year we’re monitoring the situation in Ukraine as the next potential big headline risk.
We’re also watching the relationship between the Russell 2000 small-cap index and the broader market. Since late March, small-cap stocks have lagged the broader market, which usually suggests that speculative interest in stocks is on the decline. We believe intermediate- to long-term bull market trends must be supported by speculative interest in stocks, so the current divergence indicates that the “risk-on” trade is off right now.
Given this, there are two things you should do to position your portfolio.
One? Don’t just indiscriminately sell in May.
The other is on what you should buy. Focus on the trends that remain intact — namely, low-volatility positions. Specifically, dividend stocks.
iShares Select Dividend ETF (DVY)
Click to Enlarge We know, the dividend stocks play is getting tired, but you also have to remember one of the oldest and simplest rules of investing, “the trend is your friend.” The demand for yield-bearing stocks remains high as investors flood out of the bond market and are not willing to take jump into higher volatility equity positions.
The iShares Select Dividend ETF (DVY) offers investors exposure to such dividend stocks.
Phillip Morris International (PM)
Click to Enlarge Tobacco giant Phillip Morris International (PM) continues to see improvements in its technical picture as PM stock recently broke back above its 200-day moving average at the same time that many companies are breaking below their own 200-day trendlines.
Following the trend of dividend stocks taking the lead, PM stock pays a 4.5% yield, which serves well to attract investors looking for lower-volatility bond alternatives.
Another bullish kicker for the PM stock bulls is the low analyst rankings on the stock. Currently, only 53% of the analysts with a recommendation are suggesting it as a “buy”. We like the low analyst ratings as it suggests room for upgrades.
Utilities SPDR (XLU)
Click to Enlarge Another straight-laced sector play for May is the utility sector as represented by the Utilities SPDR (XLU). This ETF is trading 14% higher for the year with little to no volatility. Like other dividend stocks, utilities are benefiting from the yield-foraging crowd that are pouring out of the bond markets.
We consider XLU units a nice allocation to maintain equity exposure through May.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.