“Sell in May, go away, and come back on St. Leger’s Day” is a famous old adage applied to equity markets as the market tends to underperform in the summer months.
The saying originally comes from London’s financial district when bankers and merchants would sell their stocks in May before the hot summers and then return after the St. Leger’s Day Stakes.
The modern day application is relatively simple, investors will sell their stocks in May before markets traditionally underperform and then return after the summer as markets heat back up heading into the holiday seasons. So, how has that strategy worked this year and should those who went away even bother coming back at all?
Market Performance This Summer
Well in general the investors who left for the summer certainly won't be regretting their decision. The S&P 500 is down roughly 6% from where it sat at the beginning and end of May. Only those who left the market on May 19 or May 20 would have seen gains (around 0.2%) if their portfolios tracked the S&P 500 perfectly. All that’s to say that selling in May was generally a good idea for most investors. Going forward, the question is if it's a good time to buy back in given current conditions.
To Come Back or Not?
There are legitimate reasons why the market hasn’t been on a bullish run the last few months and it's not because some bankers and merchants took the summer off in London. The Federal Reserve and central banks around the world have tightened monetary policy through balance-sheet reductions and significant interest rate increases. Inflation has been a significant problem since the pandemic and now central banks are prioritizing cooling price pressures despite risk of an impending, or current, recession.
The latest Consumer Price Index (CPI) report showed consumer prices staying flat in July (largely due to a massive drop in energy prices) but still had overall prices up 8.5% year-over-year. Core prices (excluding food and energy) rose “only” 0.3% after jumping at least 0.6% in each of the previous two months. The data showed some promising signs that the Fed’s policies were helping tame price pressures but it is still too early to see how effective they will be going forward.
The bittersweet sign is that the central bank believes the economy is healthy enough to withstand continued tightening of monetary policy. Jobs are still being added at a solid pace with the unemployment rate remaining below 4%. In fact, the bump in unemployment rate from 3.5% to 3.7% in August was partly due to a rise in the labor force participation rate from 62.1% to 62.4%.
That stance from the Fed remains bitter for investors though as tighter policies aren’t going to help equity markets gain ground in the near future. Recent comments from the Fed’s annual Jackson Hole retreat led to a small sell-off as the central bank reiterated its hawkish stance.
Final Remarks
It’s a very mixed picture for the rest of 2022 but there’s reasons to come back sooner rather than later. Should inflation remain under control and approach its typically targeted 2% annual rate, then the Fed may decide to stop raising rates or even lower them if the economy shows signs of slowing down.
Additionally, many retailers have been struggling this summer with discretionary spending going more towards travel and other services in a reopened world and spending decreasing overall as budgets get tighter with higher prices and wages not keeping up with that rise. The winter months and holiday shopping season should start to change that back in retailer’s favor though. That should also help many social media firms relying on advertising revenue that tends to advertise goods such as apparel or technology hardware among many other product types.
Most importantly of all, investors should at least decide to come back before the Santa Claus Rally as that has proven to be very real and provides one last gift to the nice investors who chose to believe.
