`Sell in May,' other slogans fail to gather much moss

Your Money

June 03, 2007|By Gail MarksJarvis | Gail MarksJarvis,Chicago Tribune

If you had listened to Wall Street's sloganeers and decided to "sell in May and go away," you're probably kicking yourself now.

You would have missed out on a rally that lifted the blue-chip Dow Jones industrial average and the Russell 2000 small-cap index to record highs last week.

In fact, the benchmark Standard & Poor's 500 index - for the first time in seven years - finally regained what it lost when the technology bubble burst in 2000, setting its own closing record.

Of course, there is still plenty of time for the old adage to prove right this summer.

The idea behind selling in May, and avoiding the stock market until November, is based largely on the rationale that when people are relaxing on the beach, or minding the backyard grill, they are probably not playing the stock market as actively as when the snow is keeping them inside.

In addition, analysts such as Standard & Poor's chief investment strategist, Sam Stovall, argue that the slogan makes some sense because analysts tinker with their outlooks for stocks based on the time of the year.

They are more inclined to reduce their full-year earnings estimates late in the third quarter than amid optimism early in the year, Stovall said. And downturns in expectations generally bring stocks down, which can lead to late-summer disappointments.

On the opposite side, early in the year, the market can be driven up by cash people pour into stocks - money from tax refunds and year-end bonuses.

But Charles Schwab & Co. Senior Vice President Mark W. Riepe has challenged the adage, and warned investors in a Journal of Financial Planning article that a snappy slogan should not drive investors from the market in May.

He lumps the slogan into other questionable theories about the market. Among them: the claim that the market does poorly when a team from the American Football Conference wins the Super Bowl and well when the National Football Conference wins.

The argument to walk away from the stock market in May has tended to revolve around analysis that starts with the year 1950. Analysts have pointed out that if you invested $1 on Dec. 31, 1949, in the S&P 500 index, reinvested dividends and left all the gains invested through March 2003, you would have amassed about $356, Riepe said.

Yet if every year you liquidated it in May and deposited the money in 30-day Treasury bills until the end of October, you would have been better off, with almost $384.

The trouble is that the theory - like many tested by analysts - appears less valid when you pick different time frames.

Instead of tracking results back to 1950, Riepe decided to test them back to the start of 1926, the time period some analysts use for tracking the progress of the market.

The change in the start date made a huge difference - with the investor ending up with $1,719 if he left his $1 and all the gains invested continually, but only $530 if he was liquidating in May and returning to stocks at the end of October each year.

Riepe also found that February and March tended to provide relatively lackluster returns on average, even though they supposedly are two months that are considered good for investors.

He thinks just a couple of time periods skew the assumptions about summers. He claims the fully invested approach didn't lose significant ground until 2001 and 2002, when the S&P 500 dropped 17 percent between June and October 2001, and another 23 percent during the same months in 2002.

gmarksjarvis@tribune.com

Gail MarksJarvis writes for Your Money.

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