Adages Can Lead to Damages

Of course, misleading axioms don’t just exist in the realm of health and wellness.  There are nearly as many catchy trappings when it comes to investing, and some can lead to financial harm.  For example, investors often hear the adage “Sell in May and go away.” This saying is based on the seasonality of investing, where stocks tend to underperform from the beginning of May through the end of October and outperform from the beginning of November to the end of April.

This rule of thumb certainly has historical merit.  According to Fidelity, since 1945, the S&P 500 has gained a cumulative 6-month average of nearly 2% from May through October on a price-return basis. That compares with a 6.7% average gain from November through April.  However, every year is different, and following this adage, blindly, meant missing out.

So far, in 2020, investors who chose to head to the sidelines at the end of April have been left behind, missing out on one of the best months for the market in 2020.  May was a major turning point, as the S&P 500 once again eclipsed the 3,000 level and the Dow climbed above 25,000 for the first time since the March lows.

For May, the S&P 500 catapulted 4.5% higher with strong performance from the consumer discretionary (retail), communications, health care, and technology leaders. The Dow climbed 4.26% in the month of May.

Instead of relying on adages that can lead to damages, it is better to focus on time-tested principles that lead to long-term success.  Did you know that since 2000, if you missed the best 60 days in the S&P 500, your returns would suffer significantly? (See below). Even though May has historically been an awful month for the markets (usually fifth worst month of year), May 2020 was a great month for the markets based on investor optimism.

Additionally, progress has been made in the research and trials of COVID-19 vaccinations and treatments.  Though no cure has been found, yet, many investors have been optimistic that medical science will emerge victorious in the fight against COVID-19. Hope for the future has given investors a reason to cheer as several recent clinical studies have shown promise.

Lastly, Wall Street is brushing off dismal economic data and instead focusing on a recovering U.S. economy for the second half of 2020. The Commerce Department recently revealed that GDP dropped at an annual rate of 5% for the first quarter. The second quarter is expected to be much worse, with an anticipated plunge of 40%. However, instead of focusing on the bad data that we already know is coming, investors are looking for a rebound in the third and fourth quarters.

Despite all the optimism, not everything is rosy. As we mentioned last week, with the popularity of index funds, where investors buy the whole market, many stocks are rising based more on hope than on evidence. For example, many of the companies in weaker industries, like airlines and cruise lines, with falling sales and earnings rallied, while stronger, market leading technology stocks sold off.

As we begin June, the last month of the second quarter, investors should flock back to the companies with the strongest financial health and those with promising growth opportunities. We expect companies in the consumer, health care, and technology sectors to continue to lead the markets higher.  Companies with the strongest forecasted second-quarter earnings should emerge victorious in the upcoming weeks. Those are the types of “proud to own” companies we seek out.

Though we are still in a volatile market environment, we continue to seek and hold companies with superior fundamentals.  As “they say,” discretion is the better part of valor, and we’ll continue to steward portfolios away from investment fads that pose undue risk in favor of tried-and-true methods that have stood the test of time.