Virtually every simple method for timing the stock market is
utter hogwash. That anyone buys into such mechanical "systems" goes
to show just how gullible many investors are.
But the old saw "Sell in May and go away" is a startling
exception. It really has worked over the long haul in the U.S., as
well as in foreign countries. So has the complementary "Halloween
"Sell in May" is a simple strategy. It calls for you to sell
your stocks on April 30 (okay, not quite in May) and buy them back
at the end of October. That allows you to cash in on the Halloween
effect, which holds that stocks deliver more treats than tricks
between that ghoulish holiday and the end of April.
Had you bought stocks last October 31, you would have done quite
well. From that date through April 15, Standard & Poor's
500-stock index returned 11.2%. By contrast, during 2012's
unfavorable six months, the S&P 500 returned just 2.2%.
The Halloween effect doesn't work every year. But, on average,
over the past 50 years, the S&P returned 8.5% from November
through April, compared with just 2.4% from April through October,
according to Morningstar.
There's more: An academic study examined the Halloween effect in
108 countries over as long as 319 years -- and found that it
worked. Not in every country, but in the overwhelming majority of
, whose lead author is Ben Jacobsen, a finance professor at Massey
University in New Zealand, found that worldwide stock markets rose
an average of just 2.4% from May through October. From November
through April, by contrast, stocks gained an average of 6.9%. (The
study examined only price gains because dividend data often isn't
available for earlier years.) You can read
my October piece on the study here
No one knows why the Halloween effect has worked -- and has
worked so widely and consistently. Jacobsen theorizes that it has
something to do with people selling stocks to raise cash for summer
vacations. That would explain why the strategy does best in Western
Europe and almost as well in the U.S. Because these areas are
relatively affluent, their inhabitants are more inclined to spend
the most on vacations. The growing number of people taking
vacations and their rising costs would also help explain why the
Halloween effect has strengthened markedly in the past 50
Unfortunately, the approach of May isn't the only reason to be
cautious about stocks today.
My main concern is the sequester
-- the spending cuts that Congress and the president agreed to
because they couldn't cut a deal on long-term reductions in
Spending cuts make no sense with the economy still stuck in low
gear and unemployment so high. Europe has been trying austerity
during hard times, and the result has been a deepening
The $85.4 billion in spending cuts this fiscal year, coupled
with a two-percentage-point rise in the payroll tax, will reduce
gross domestic product this year by roughly 1.5 percentage points,
economists estimate. "You can't take more than 1.5 points of GDP
out of the economy more or less overnight and expect nothing bad to
happen," Ian Shepherdson, chief economist at Pantheon Macroeconomic
Advisors, said in a note to clients. "In the labor market, at
least, we see a real risk of even worse news down the line."
Even more troubling, roughly $90 billion in fresh cuts will kick
in next October unless Congress and the White House can agree on a
Corporate earnings are another reason to worry about your stock
investments. Corporate earnings in the first quarter are likely to
rise by a meager 0.5% from the same period in 2012, says Sam
Stovall, chief equity strategist at S&P Capital IQ.
With the labor market moribund, robust corporate earnings
coupled with the Federal Reserve's loose-money policies are the
main reasons stocks have performed so well over the past four
years. Now the earnings side of the equation could be in
Meanwhile, the mess in Europe keeps worsening. The euro zone has
been remarkably lame in trying to remedy its ailments. Mainly, it
suffers from the same kind of political gridlock the U.S. does --
with southern European countries arguing for more spending and
those in the north, which would foot the bill, favoring austerity.
Consequently, almost the whole continent is in a deepening
recession. That can't be good for the U.S.
What's an investor to do? In spite of the relatively poor
results historically in the April-through-October period, the
market still usually goes up. And no method is foolproof.
Besides, some market indicators are flashing green. Stocks are
still reasonably valued. And the market remains technically strong
by most measures (for example, many more stocks have been rising
than sinking during the rally). It's rare for bear markets to begin
until a market advance is led by relatively few stocks.
So I'm certainly not recommending that you dump all your stocks
now. What I think does make sense is to cut back by five to ten
percentage points - and plan to buy back on Halloween.
Steven T. Goldberg
is an investment adviser in the Washington, D.C. area.