FYI | May 04 2012
By Peter Switzer, Switzer Super Report
May is upon us and it’s the most significant month to take stock of where we are, where we have been, and where we could be heading.
Regular readers know I’m a student of market history and the ‘sell in May and go away’ rule has a lot of support on Wall Street. In fact, one of Australia’s best fund managers, Wilson Asset Management’s Geoff Wilson, told me on my Switzer program on Sky Business that his ‘dear old dad’ invested on that basis and more times than not he got it right!
Last year, over the May to October period, the S&P 500 dropped 19% from 1,363.61 on 30 April 2011, to 1,099.23 on 3 October – a fall of 19%. Since then to the end April 30 this year, the market has headed 27% higher to 1,397.91.
In Australia, the S&P/ASX200 hit a high of 4,913.8 on 21 April 2011, around a week and a half before the start of May, before falling to 3,863.9 on 26 September. That’s a 21% fall. Since then, to the end of April, it had risen 14% to 4,396.6.
Bucking the trend
The critical question for us is will 2012 be a year where the ‘sell in May’ rule ends up being bad advice?
BlackRock’s Bob Doll thinks the market grinds higher, but that doesn’t rule out the possibility that we will see some significant sell-offs before the stock market embraces another big spike up.
There is also a pretty important consideration for Aussie investors and that’s around the fact that we have performed relatively badly compared with Wall Street since the post-GFC rebound on 9 March 2009. Are we set to close the gap? The likes of Geoff Wilson and Phil Ruthven of IBISWorld have predicted an eventual big market rally, with Phil telling us that a 40% jump in one year would not surprise him!
So, what are we seeing that could make us believe in the optimistic story?
The ISM manufacturing number in the USA was a good sign, despite the fact there has been some mixed economic news out of the States. Also, the recent company reporting season has been a bottler, with earnings up around 6% compared with an expectation of 2%. Some 73% of 287 S&P 500 companies that have reported outperformed analysts’ expectations. Also, Ben Bernanke has reasserted his commitment to keep interest rates low, which suggests if the US economy needs a third stimulus package, it will get it. Don’t you love election years?
Back home, the Commonwealth Bank cutting interest rates by 40 basis points will be a confidence jogger for both consumers and business. It will also bring term deposits down making stocks – especially great dividend payers – much more attractive.
What I’m doing
I know Europe will cause some ructions to stock markets now we’re in the May zone, but I will be buying dips and believing that the S&P 500 could head towards 1,550 by year’s end and the S&P/ASX 200 could easily bust through 5,000. However, just be prepared for some downs to go with the ups.
As I always say, if you don’t like the heat of the stock market kitchen, then play a fixed income game. By the way, if you hate stocks, maybe you should do a 50:50 play – 50% in stocks and 50% in fixed income. In the long run, this mix traces closely the average march of stocks without the highs and those damn lows!
For my part, I say, sell in May – NOT!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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