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Perspective on Equity Investing

May 2011

“The most successful investors have ignored seasonal trends altogether.”


SELL IN MAY AND GO AWAY?
With major stock indices at multi-year highs, is the “Sell in May and Go Away” often cited truism a good rule of thumb? The saying stemmed from the belief that most of the gains in stock prices take place from November through April, presumably coinciding with bonus payments and contributions to pension funds that create a buying surge. Under this truism, investors should sit out the summer months when things have traditionally slowed down, and reenter the markets in time to catch a November upswing.

What about this year? We have been reporting on the continued economic recovery—marked by strong corporate earnings coupled with low interest rates—which has driven the Dow and the S&P 500 Index to their highest levels since 2008. And so far, of the 398 S&P 500 companies that have reported earnings, 73% were above analysts' expectations, according to Bloomberg data.1 To many investors, this may seem like a good time to take profits and sit in cash until the fall.

THERE IS SOME TRUTH TO THE TRUISM
Has “Sell in May and Go Away” worked for investors in the past? Let’s look at history. While there is some truth to the practice, it misses the far more important point that investors who remained in the markets through all seasons reaped the greatest reward.


FIDUC_PEMAY_0511_lch (2).gif

The chart shows that an investor who followed the truism and sold every May and reinvested every November from 1950 through 2010 would have seen his $10,000 nest egg grow to nearly $400,000, excluding dividends. As it turned out, this winter-season investing approach fared much better than investing during the summer months. In fact, an investor who did just the opposite by buying in May and selling in November every year had only $17,000 to show for this summertime investment strategy.

The real story, however, is about the investor who ignored seasonal trends altogether. He invested $10,000 in 1950 and watched his investment grow to nearly $660,000 by 2010!2  So much for conventional wisdom. Stay the course. 

FORCES PROPELLING GROWTH ARE STRONGER THAN HEADWINDS
We are constantly evaluating the risks and opportunities the markets are presenting. Company earnings are continuing to rise, jobs are being created and the housing market is slowly improving. The Fed is giving us confidence it is in control and can, when the time comes, blunt inevitable inflation. Risks are ever present and we observe that the rate of earnings growth is slowing, which is not surprising as the recovery from recession ages.

This change may suggest to some that equity valuations are higher than reported and bring on higher volatility and bouts of uncertainty. Prices of everyday things, especially energy, are rising, which can’t but hurt some sectors as consumers rearrange their spending. So far, our view is that the forces propelling growth outweigh the headwinds. If and when the investment climate turns less favorable, we will not hesitate to take actions to protect portfolios.

Mackin Pulsifer
May 16, 2011

 

1. As of May 5, 2011.
2. Source: Bloomberg. These figures have been calculated using the S&P 500 Index
.

 
This communication is intended to provide general information. The information and opinions stated are as of the date indicated, and do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. Historical performance does not guarantee future results and results may differ over future time periods. 

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ABOUT THE AUTHOR

MackinPulsifer_3370.JPGMackin Pulsifer
Vice Chairman and
Chief Investment Officer

Mackin Pulsifer is Vice Chairman and Chief Investment Officer of Fiduciary Trust. He manages individual, foundation and trust portfolios and is lead manager of the Franklin Large Cap Equity Fund.


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