(By Frank Holmes) One catchy investing maxim that's popular this time of year is "sell in May and go away," the notion that investors should cash in their investments and take the summer off. Historically, this hasn't been a bad strategy. You can see from this chart that June, July, August and September have been the worst four months of the year for the S&P 500 Index since 1988.
Since 2000, the June-September period for the S&P 500 is split. Half of the years saw positive returns, while the other half were negative. Historically, you have only about a fifty-fifty chance for a positive gain during those months while your odds are roughly 10 percent better during the rest of the year.
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The trend is less consistent for emerging market stocks. You can see that the median monthly return for the MSCI Emerging Markets Index since 1988 is negative for June and August, but positive for July and September. The frequency of positive returns during the June-September period is roughly 6 percent lower than the rest of the year.
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Last year, investors who employed the "sell in May" strategy averted an almost 17 percent drop in the S&P 500 and a nearly 25 percent drop in the MSCI Emerging Markets Index from June-September. Summer of 2010 was a similar experience.
With last year fresh on the minds of investors, should they take this summer off? We don't think so.
We believe it's a much better market this year. After following a similar trajectory as the previous year from October to the beginning of March, improving economic data pushed the S&P 500 over 3 percent higher in March 2012 after trending sideways during the same time period last year.
Real GDP in the U.S. grew 2.2 percent during the first quarter of 2012 versus 0.4 percent during the first quarter of 2011, and several areas of the economy are much stronger than they were a year ago. Nonfarm payrolls (up 29 percent), ISM Manufacturing (up 2 percent) and auto sales (up 8 percent) have all improved from a year ago, according to J.P. Morgan. In fact, auto sales are currently at a four-year high.
More importantly, the U.S. housing sector continues to improve.