PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
A Wall Street adage recommends investors take a break from stocks in May. The saying goes "Sell in May, and then walk away," indicating that stock-price movements historically have been substantially stronger in the November to April period than in the May to October stretch. It suggests that investors move into cash in May, steering clear of a typically weak period for equities, and back into stocks in November, when share prices usually begin to bounce back. Of course, as readers already know, past performance is no guarantee of future results.
Source: Standard & Poor's
A survey of price action for the S&P 500 Index from April 30, 1945, through April 21, 2006, shows that the old saying may have some merit -- but it doesn't necessarily hold true for every segment of the market, as we shall see. While the S&P 500 advanced an average of 7.1% during the November to April period over that span (without dividends reinvested), it posted an average gain of only 1.5% from May through October. What's more, the November through April period outperformed May through October 68% of the time.
The adage didn't work in 2004-05 (the S&P 500 gained 2.4% from October 31, 2004, through April 30, 2005, vs. a 4.3% advance for the 500 from April 30, 2005, through October 31, 2005), but the 8.6% advance from October, 2005, through April, 2006, may place this notion back on firm footing.
CASH INFUSIONS. History shows that the S&P 500's worst month is September, and that the worst three-month period is the third quarter, because, in our opinion, analysts typically reduce their full-year earnings estimates as third-quarter results are about to be released. October is historically a month in which the market establishes a bottom, so the S&P 500 enters November at a fairly low level compared to other months. This gives the November through April period the advantage of starting at a lower base.
The November through April stretch also includes two periods of large cash infusions into the market: January, when pension funds typically put a lot of money to work, and April, when many individuals add to their IRAs. November is also around the time of year that analysts begin looking ahead by five quarters, rather than just focusing on the final one or two.
One thing we always do, of course, is look at things from the sector level. Have S&P 500 sectors experienced a similar skewing of performances? Over the past 16 years (the most available for S&P 500 Global Industry Classification Standard sector data), it appears that they've also seen a pronounced seasonal pattern.
WINTER WONDERLAND. The table below shows simple average price changes (without dividends reinvested) during the two six-month periods for sectors in the S&P 500 from April, 1990, through April, 2006, along with their frequencies of outperformance (FO). The FO helps identify those sectors whose average performances may have been skewed by one or two stellar periods.
As with the overall market, the table shows that most sectors have seen their best results in the November through April period. On average, none of the groups posted negative results during the November through April interval, while two sectors posted average declines in May through October.
S&P 500 Sector Average Performances (Price Only) and Frequencies of Market Outperformance: April, 1990, to April, 2006
Nov.-April
May-Oct.
Sector
% Chg.
Freq. of Outperf.
% Chg.
Freq. of Outperf.
Consumer Discretionary
11.1
56%
(0.7)
38%
Consumer Staples
4.9
56%
5.1
63%
Energy
7.9
44%
2.6
50%
Financials
10.8
75%
3.5
63%
Health Care
6.5
50%
5.6
63%
Industrials
9.7
75%
0.2
19%
Info. Tech.
10.3
63%
3.3
63%
Materials
10.2
69%
(2.5)
31%
Telecom. Svcs.
2.7
31%
1.4
56%
Utilities
3.4
31%
1.9
44%
S&P 500
7.6
NA
1.9
NA
Source: Standard & Poor's
WORTH CHANGING. This study shows that a market timer probably wouldn't bother taking a long position in the S&P 500 from November through April and then move into cash during May through October, since the full-year return, after commission costs, would likely have been substantially worse than staying in the S&P 500 all year long.
Yet an investor who was long on the market from November to April but then adopted a defensive approach by rotating into either the S&P Consumer Staples or Health Care sectors during May through October would have found -- as can be seen in the chart below -- that the returns were worth the effort.
Source: Standard & Poor's
The 15-year compound annual growth rate for the S&P 500 was 8.8% (without dividends reinvested). Owning the S&P 500 November through April and then rotating into the S&P Consumer Staples sector from May through October would have returned 12.2% per year. What's more, a similar rotation approach that substituted Health Care for Consumer Staples would have returned 12.7% on average. Had an investor rotated into either the S&P Consumer Staples or Health Care sectors, rather than cash, from May to October, they would have improved their returns by 38% to 44%.
Industry Momentum List Update For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of April 21, 2006.
Subindustry
Agricultural Products
Computer & Electronics Retail
Construction & Engineering
Construction Materials
Diversified Metals & Mining
Human Resource & Employment Services
Multi-Sector Holdings
Oil & Gas Equipment & Services
Oil & Gas Refining & Marketing
Railroads
Steel
Trading Companies & Distributors
Stovall is chief investment strategist for Standard & Poor's Equity Research Services
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
Printer-Friendly Version