Springtime for Wall Street is a lovely thing to behold this year: stocks up, Treasuries holding their own, corporate bonds robust and junk bonds flying off the shelves.
According to market historians, there’s at least one problem: the calendar.
A seasonal pattern in the demand for investment securities is well-entrenched, to the point of a clever rhyme: “Sell in May and then walk away.”
Since 1986, the Stock Traders’ Almanac has been promoting the beauty of the six-month cycle in stocks.
In the 52 years through 2001, the Dow Jones industrial average gained more than 10,000 points from Nov. 1 through April 30. The Dow has lost 360 points from May 1 through Oct. 31 over the period.
Only twice did the Dow suffer double-digit percentage losses in the autumn-spring months–in 1970, when the United States invaded Cambodia, and in 1973 during the Arab oil embargo.
Sam Stovall, chief investment strategist at Standard & Poor’s, presents additional evidence, based on 30 years of performance by the benchmark Standard & Poor’s 500 index.
The index climbed an average 7.4 percent in the November-through-April period and 1.0 percent from May through October.
Stovall cites the tendency of investors to put money into the market in January and before the April 15 tax deadline. Summer is the time to read books on the beach, not balance sheets on the kitchen table.
After stocks bottom in September and October, investors typically become inspired in November, ahead of what they hope will be a January rally.
The cycle seems logical and the data are compelling. But this time it could be different.
January 2003 yielded an uncharacteristic decline in stocks The November-through-April period produced below-average results. The Dow gained just 1 percent. The S&P 500 index rose just 3.5 percent, half the average rate.
Optimists say the build-up to the Iraq war and the war itself postponed the normal seasonal rally, which is now under way. The Dow gained 6 percent in April; the S&P 500 index jumped 8 percent.
The latest round of corporate earnings and outlooks injected momentum into the rally. The expected fiscal and monetary stimulus in advance of a presidential election year will kick in soon, according to the upbeat outlook.
In a twist on the six-month cycle theory, Stovall notes that health care and consumer staples are the best performing stock sectors during the May-through-October doldrums. An investor who held the S&P 500 index for the autumn-spring periods and switched into health-care stocks (such as Medtronic and Pfizer) or consumer staples (such as Coca-Cola and Procter & Gamble) would have done well.
Sales commissions and capital gains taxes dilute any such short-term switching strategy, he cautions.
Wednesday’s action: Stocks marked time, as investors tried to decipher the mixed message in Tuesday’s economic analysis by the Federal Reserve.
A disappointing sales outlook by computer networking systems developer Cisco Systems, issued late Tuesday, blunted recent optimism about technology stocks.
Oil prices rose after news of an unexpected drop in U.S. crude oil inventories.
Treasury securities rallied after the Fed on Tuesday voiced concerns about deflation. The Treasury’s auction of $18 billion in 5-year notes brought a lower-than-expected yield of 2.68 percent, reflecting strong demand for the notes.
The dollar, which has slumped in recent months, rallied against the Euro, after Germany reported a jump in unemployment.
The Dow Jones industrial average fell 27.73 points, to 8560.63. The biggest mover among the Dow stocks was Coca-Cola, which jumped $2.25, to $43.27. An analyst at Morgan Stanley known for his skeptical views of Coke boosted his rating on the stock.
The broader Standard & Poor’s 500 index lost 4.77, to 929.62; the Nasdaq composite index fell 16.95, to 1506.76; the Russell 2000 index of small-company stocks dropped 2.52, to 410.23.
Cisco Systems closed down 42 cents, to $15.48.
New York Stock Exchange volume reached 1.51 billion shares. Nasdaq volume totaled 1.88 billion shares.
