With Economy Stalling, Time to Sell in May and Go Away?

Should you follow the old Wall Street adage to “Sell in May and Go Away”? You might be tempted to do so, especially with economic growth crawling at a measly 0.5 percent annualized pace in the first quarter, consumer spending decelerating for the past nine months and corporate earnings on track for a third consecutive quarter of declines—the longest streak since the financial crisis. 2016 has been a year of investor anxiety, starting with a swift Jan-Feb 10 percent stock market correction. Now that indexes have clawed their way higher, many are worried that something ominous is brewing for the summer. This week’s employment report could either fan the fear flames or tamp them down. Analysts expect that 200,000 jobs were created in April and the unemployment rate will remain at 5 percent.

If those estimates were to come in on target, they would add to the mostly upbeat data on jobs that we have seen over the past few years. According to Calculated Risk, through March, total employment was 5.3 million above the previous peak and up 14 million from the employment recession low. Last week, although the Federal Reserve did not raise interest rates, it acknowledged that since its previous meeting six weeks prior, “Labor market conditions have improved.”

But the broad numbers may not paint a true picture of the employment landscape. Steve Murphy of Capital Economics notes that there has been a surge of low paying jobs in sectors like retail and leisure, while “at the same time, employment in higher-paid sectors such as manufacturing and mining has fallen back sharply. More generally, there has been a sharp deterioration in the quality of jobs created.”

Career coach Connie Thanasoulis-Cerrachio, co-founder of SixFigureStart® says her on-the-ground-interaction with employers and candidates echoes that sentiment: “We see a tale of two [labor] markets – strong candidates have a great market. Mediocre ones are still have a hard time.” What makes a strong candidate? It helps if those seeking jobs are looking in the hot industries that are hiring, like technology, healthcare, accounting, marketing/data analytics as well as the non-profit world, which Thanasoulis-Cerrachio says is “booming”.

Even if many parts of the economy are growing and employees do eventually see an uptick in their paychecks (Capital Economics expects “to see a marked acceleration in hourly wage growth to around 3 percent by year-end”), the stock market may still stumble, due to valuations, exogenous events across the globe or plain old exhaustion, which brings us back to the original question of selling in May. According to Charles Schwab, “since 1950, nearly all of the S&P 500’s gains have occurred between October and April. The mean return during May through October was 1.3 percent; while for November through April it was 7.1 percent.”

Unfortunately, “Sell in May and Go Away” hasn’t been as reliable over the past dozen years. It didn’t work from 2012-2014, or from 2003-2007, so you may want to stick to the tried and true strategy of investing in a diversified portfolio, targeted to your specific goals. Not as catchy as “Sell in May and Go Away”, but probably a smarter way to manage your money.

MARKETS:

• DJIA: 17,773 down 1.3% on week, up 2% YTD
• S&P 500: 2065 down 1.3% on week, up 1% YTD
• NASDAQ: 4775 down 2.7% on week, down 4.6% YTD
• Russell 2000: 1130, down 1.4% on week, down 0.4% YTD
• 10-Year Treasury yield: 1.83% (from 1.9% a week ago)
• June Crude: $45.92, up 20% on month, up 75% since bottoming out in February at a 13-year low
• June Gold: $1,294.90, highest level in 15 months
• AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.13 wk ago, $2.58 a year ago)

THE WEEK AHEAD:

Mon 5/2:

AIG

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Construction Spending

Tues 5/3:

CBS, BMY

Motor Vehicle Sales

Weds 5/4:

Tesla, Lending Tree, Priceline

8:15 ADP Private Sector Employment Report

8:30 International Trade

8:30 Productivity and Costs

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Manufacturing Index

Thursday 5/5:

Alibaba, Merck, GoPro, Herbalife

Chain Store Sales

Friday 5/6:

8:30 April Employment Report

3:00 Consumer Credit

Sell in May and Go Away?

Is the US economy finally back to a "normal" jobs market? Unfortunately, not yet. At first blush, the employment report was much better than expected, but pessimists found plenty to highlight as well. First the good news: The economy created 288,000 jobs in April and there were upward revisions to the previous two months, amounting to an extra 36,000 jobs than were previously reported. Total monthly job creation over the past three months has averaged 238,000, an improvement over the past year’s pace of 190,000.

Additionally, the unemployment rate dropped to 6.3 percent, the lowest level since September 2008, but most of the decline had to do with a massive 806,000 reduction in the labor force, which pushed down the participation rate (the number of people employed or actively seeking employment) to 36-year lows of 62.8 percent. Still, while the monthly results on the rate might seem discouraging, the folks at Capital Economics remind us, “The labor force has increased by about 1.5 million over the past six months.”

As most know, the top-line unemployment rate only captures those who have a job or are actively looking for work. A broader measure of joblessness, which includes those who have stopped looking for work as well as people working part-time for economic reasons, fell to 12.3 percent, which is certainly an improvement 13.9 percent from a year ago, but still very high.

The ranks of the long-term unemployed continued to show progress, dropping by 287,000 in April to 3.5 million. Over the past year, the number of long-term unemployed has decreased by 908,000 and the median duration of unemployment dropped to 16 weeks, which is down from 20 weeks a year ago and half the amount of time it took to land a new job at the worst part of the jobs recession. Still, from 1994 through 2008, roughly half of all unemployed jobseekers found jobs within 5 weeks, which shows that the labor market remains far from normal.

There has also been concern about quality of jobs created during the recovery. Nearly five years after the end of the recession, job growth is still heavily concentrated in lower-wage industries. The food services and drinking places, administrative and support services (includes temporary help), and retail trade industries continue to lead private sector job growth during the recovery.

The addition of low-wage jobs is keeping a lid on average hourly earnings, which were unchanged last month and the annual growth rate of hourly earnings slipped back to 1.9 percent from 2.1 percent. Before the recession, wages were regularly growing at above 3 percent year-over-year. Wage growth and an increase in hours worked are the necessary components to help consumers feel confident enough to eventually pick up their spending.

What’s the bottom line? The labor market is improving, but we are not there yet, which may be why markets barely budged on the news. Or maybe it’s something else…could investors be thinking about the old trader’s chestnut, “Sell in May and Go Away” The market-timing strategy says investors should get out of stocks in May, avoiding the volatile spring and summer months; and then jump back in after October to enjoy an end of the year rally. There is some statistical evidence to back the adage. According to S&P Capital IQ (as cited in the Wall Street Journal), since 1977, the S&P 500 has averaged a total return, including dividends of 3.3 percent from May through October. That performance dramatically lags the Barclays Aggregate Bond Index, which has averaged a 7.6 percent gain during those same months for the past 36 years.

Skeptics brush aside the idea as a trading trap, warning investors to stick to their long-term game plans. After all, while the data may confirm a trend, in any year the results might change. Last year, the S&P 500 jumped 10 percent from May through October, so selling in May and going away would have been a terrible strategy. Bottom line: ignore the rhymes and stick to your diversified, balanced portfolio!

But there may be other reasons to consider taking a hard look at your asset allocation and ensuring that your stock position is not too weighty. Consider the front-page Wall Street Journal headline, “Retirement Investors Flock Back to Stocks,” which highlights new data from Aon Hewitt showing that stock investments accounted for two thirds of employees' new contributions into retirement portfolios in March, the highest percentage since March 2008! Um, contra-indicator, anyone? This could be a case where retail investor enthusiasm may come at a market top.

After all, it’s been three years since the S&P 500′s last correction began. On April 29, 2011 the S&P 500 started a long and volatile decline from 1363.61, which ended five months later (on October 4) and 19.9 percent lower (1099.23). Since then, there have been five pullbacks of more than 5 percent but less than 10 percent. The biggest of those declines was a 9.9 percent drop that lasted from the April 2, 2012 close through June 1, 2012.

MARKETS:

• DJIA: 16,512, up 0.9% on week, down 0.4% YTD
• S&P 500: 1881, up 1% on week, up 1.8% YTD
• NASDAQ: 4123, up 1.2% on week, down 1.3% YTD
• 10-Year Treasury yield: 2.59% (from 2.66% a week ago, lowest yield of year)
• June Crude Oil: $99.76, down 0.8% on week
• June Gold: $1302.90, up 0.1% on week
• AAA Nat'l average price for gallon of regular Gas: $3.68 (from $3.52 a year ago)

THE WEEK AHEAD:

Mon 5/5:

Pfizer, AIG

10:00 ISM Non-Manufacturing Index

Tues 5/6:

Disney, Whole Foods, Groupon

8:30 International Trade

Weds 5/7:

A-B InBev, Tesla, AOL, Zillow

8:30 Q1 Productivity

10:00 Yellen Testifies before Joint Economic Committee

3:00 Consumer Credit

Thurs 5/8:

News Corp, CBS

7:30 ECB/BOE Interest rate decision

Chain Store Sales

8:30 Weekly Jobless Claims

10:00 Yellen Testifies before Senate Budget Committee

Fri 5/9:

Ralph Lauren

10:00 Wholesale Trade

10:00 JOLTs