FYI | May 18 2006
By Rudi Filapek-Vandyck
The sell-off in global equities this month has brought back to the fore the old stock market saying "sell in May and go away". Various other media and commentators have already picked up the theme recently.
One of our readers sent us an email about it, and for those who may have missed the figures behind the facts, here’s a reminder: an investor who would have placed US$10,000 in the Dow at the end of April each year since 1950 and sold at the end of October would have ended up with a net loss of US$272.
Someone doing the opposite (i.e. buying in November until April) would have generated a positive return of US$534,323.
The Dow has risen 0.3% on average in the May-to-October period since 1950. For the November through April period, the Dow has climbed 7.9%- a performance that reflects year-end bonuses, tax refunds and pension-fund contributions flowing into stocks, according to the email.
Last year, the Dow gained 2.4% in May to October and then climbed 8.9% from November to last week.
There’s also another indicator to "explain" the current weakness in the US equities market, the so-called "Election Cycle’s Validity".
According to the email, there is validity to the seasonal trend in any given year, but especially in an election year.
Apparently, data from S&P shows that in a president’s four-year term, the second and third quarters before mid-term elections (as is the case this year) are the weakest periods for US equities.
The figures to back this statement up are: The S&P 500 has fallen 2% and 2.2%, respectively, on average since 1945. The Dow average’s low for years that featured mid-term elections was 22.2% below the previous year’s high on
average since 1913.
The email concludes with: This year, the trend may be especially meaningful when we think about how low the popularity of president Bush and Congress has dropped.