Ten Reasons to “Sell in May And Stay Away” This Year

April 21, 2014

Historic Indicators Point To A Significant Sell-Off Ahead

After rising over 26% in 2013, the U.S. stock market remains flat three and a half months into the new year, battered by an increasing list of worries not easily brushed away.  The following are 10 compelling reasons to pare back risk exposure, especially if you’re retired or are about to retire, i.e. you can’t make up for large losses via ongoing 401(k) contributions, and/or your accounts represent monies that it’s taken you 30 years to save:

  1. The Russell 2000 small-cap index is trading at 83 times estimated 2014 earnings, a level so obviously exuberant and unsustainable in light of historic norms that it’s begging for a massive sell-off.
  2. Margin debt at the New York Stock Exchange is once again at all time record highs in spite of recent increases in the interest rates being paid on that debt.  The last two times margin debt was this high was months before the crashes that began in 2000 and 2007.
  3. The Federal Reserve’s balance sheet now shows $4.26 trillion, up from $915 billion at the end of 2007, a 466% increase.  Many wonder exactly to whom the Fed will be able to sell those mostly lower-yielding bonds after they raise interest rates some 4 percent over the next 2-3 years, short of simply holding them to maturity at a comparable loss.
  4. 2013 saw a record amount of corporate debt (bonds) issued, much of which was used to repurchase corporate stocks, causing the increase in share price thereof, coincidentally gleaning large bonuses to corporate officers. (Executive bonuses are often based on stock price performance, and are often paid in stock options and/or bonuses.)  Not all stocks are up because of increased sales.
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  5. As it enters its sixth year, the bull market is in the latter stages of the business cycle, and sentiment indicators such as the Citigroup Panic/Euphoria Model seem to be pointing to a topping market.  The average bull market lasts 3.7 years.
  6. Of the 12 bull markets since WWII, only four have made it into their sixth year.  It has now been 28 months since the last market correction, an indicator that concern is increasingly justified given that the average interval between such corrections is 16 months.
  7. Of the 16 quarters of a four year presidential term, the second and third quarters of midterm election years have historically been the weakest two of the 16.  We are now a month into that 6-month period.
  8. Since 1950, the Dow Jones Industrial Average has returned an average of 0.3% from May to October, and an average of 7.5% from November through April, hence the long-held axiom “Sell in May and Stay Away”.  While 2013 proved the exception—largely due to Ben Bernanke’s monthly purchase of $45 billion in mortgage-backed securities—the Spring of 2014 finds Janet Yellen’s Fed slowing those asset purchases, as well as pledging massive interest rate hikes soon thereafter.
  9. 2014 marks the tenth straight year that brokerage-employed economists have over-forecast economic growth for the coming year.  As John Early recently pointed out on Seeking Alpha, “current market valuations rest on the assumption that we are returning to ‘normal’ growth.  If/when growth falls back to 1% or turns negative this year or next, the jarring gap between expectation and reality could create a stock market crash.  The combination of weak growth, (overvalued stocks), and the shift to unfavorable demographics, create the potential for a 40% to 80% decline in U.S. stock indexes…  Protecting capital should be (investor’s) primary concern.”  (emphasis added).
  10. Saxo Bank Chief Economist, Steen Jakobsen, last month predicted a 30% plunge in the S&P 500 by year end 2014.  Jakobsen added that if investors only have the potential of another 2-5% upside from here, it might be worth backing out of equities starting now.  Statistically speaking, he said markets correct 25% to 30% about every five years, adding that we are currently in the sixth year of the present bull market.

Dallas Fed president, Richard Fisher, recently confirmed all of this by saying, “We must monitor these indicators very carefully so as to insure that the ghost of irrational exuberance does not haunt us again…”  Too late, Dick.  We whistled past that marker several miles back, and this train seems oblivious to the sharp curves and unstable track ahead.  Buyer beware.

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Thomas K. Brueckner

President & Chief Executive Officer

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