Sell in May………………?
David R. Kotok
April 30, 2011
Sell in May and go away? Is it a cliché or is this the year to obey?
First, let me offer a personal thank you to CNBC for the invitation to discuss this issue on Power Lunch with Michael Farr, Sue Herera, and Tyler Mathison. For those who were advised of the TV schedule and were looking for us, we were seated in the chair at the remote studio in Sarasota, when there was a satellite glitch in that facility. By the time they reconnected to CNBC, the segment had concluded.
In addition, thank you to my friend Michael Farr, who covered for me on the bank stock outlook. Michael and I agree that they are ripe candidates for underweighting. For the discussion, see CNBC.com and search on “Farr”. Choose the clip for Friday, April 29, at 1:05 PM EDT.
Here are the bullet notes we had planned to use in the interview. Michael and I concur that the key to the US stock markets’ forward behavior is held in the hands of the Federal Reserve.
1. Sell in May and go away has supportive history.
2. Our work suggests avoiding markets in the May-Nov period when the Fed is tightening
3. Seasonally negative results are neutralized when the Fed is easing.
4. This year the Fed stops easing in June and goes to neutral and maintains balance sheet size; therefore, the outcome is not clear.
5. But the new FDIC fee assessment method on banks is a negative force, so sell in May could be correct.
6. We are fully invested today but may cut back at any time. We are overweight energy but may peel back. We like the health care sector. We are avoiding banks, so we are at max underweight and have been for a while.
One more element must be added to the list. The US stock market rises and the US dollar falls. There is a relationship. Global investors are allocating flows of funds away from the dollar. This activity is at the margin and explains why the US currency is weak. When the Fed completes QE2 in June, it will go to a holding pattern. It will purchase treasuries in enough quantity to offset the maturities in the Fed’s mortgage portfolio and to roll the rest of the US Treasury holdings. So the Fed will still be in the market buying treasuries. And the mortgage market is still under pressure from liquidation of the GSEs and from the very tepid conditions in the US housing markets.
That is the likely case in July and for the rest of the year. So is that a form of Fed easing, in which case selling in May is premature? Or is this a Fed at neutral, in which case the cliché may be ready for respect. The honest answer is, we do not know, because we have never been in this position of Fed construction before. We may get our first clues from the action in the foreign exchange markets.
We believe the economy is showing more signs of weakness. And we believe the oil price shock is starting to bite as the gasoline price rises into the $4-plus range. It just topped $5 in Connecticut. And we see the foreclosure rate remaining high and the employment reports continuing weak. This tells us that the Fed wants to avoid any chance of tightening, whether it is passive or active. If we are correct, the Sell in May syndrome will be muted, the dollar will remain in a weakening trend, and the stock market bull run is not over.
All of this could change very quickly. So while we are fully invested today and while we are overweighted energy today and underweighted banks today, we could change this at any time.
Sell in May does not specify the date in May. May 30 is a long time from today, with the indicators this sensitive.
Many thanks again to Michael Farr and CNBC and especially to Jennet Chin, who worked behind the scenes so patiently to put the segment together.
David R. Kotok, Chairman and Chief Investment Officer