Springtime is here and Bay Area weather is changing. Financial markets have seasons, too. They can arrive early or late in any given year, but we know they are coming. One is approaching right now, in fact.
You may have heard the saying “Sell in May and go away.” The idea comes from a historical pattern traders observed decades ago. Stocks tend to perform better in the colder half of the year. The six-month period from November through April is typically better than May-October. Many studies show that buying stocks around Halloween and selling at the end of April brings better long-term returns and/or reduced risk.
This pattern is not evident every year, of course. May 1 and October 31 aren’t always the magical days. Like the weather, stock market seasonality is variable. Sometimes we get a warm spell in autumn, or a cold day in spring. As Mark Twain observed, “The coldest winter I ever spent was a summer in San Francisco.”
How does the financial weather look this year? The report is mixed. On the bullish side, the Federal Reserve is continuing its “quantitative easing” efforts. By force-feeding new money into the markets, the Fed keeps interest rates low and subsidizes risk-taking. Banks are lending and the economy is growing, albeit slowly. Wall Street can frolic in the sunshine.
At the same time, a cold front could still move through with little warning. As noted above, a typically weak seasonal period is about to begin. Corporate earnings are generally meeting expectations, but the second quarter could be a different story. Washington is practically paralyzed by partisan bickering. Europe still has no solution for its debt crisis.
A summer rally is always possible. If I were a TV weatherman, I would say the roads are safe but bring a jacket with you. As an investment advisor, I have similar advice: stay invested but exercise caution. Avoid unnecessary risks. The weather could change quickly. Focus on the long-term and manage risk.