Sell in May? No Way - Adviser Investments

Sell in May? No Way

May 10, 2021

Please note: This update was prepared on Friday, May 7, 2021, before the market’s close.

It’s tempting to say that everything’s coming up roses in May. And why not? Stocks have risen at a 40% annualized rate, while red-hot corporate earnings sparked a rally on Thursday that pushed the Dow Jones Industrial Average to its second consecutive record close, with the S&P 500 just shy of an all-time high. All good news.

Yet we’re starting to see some rain clouds forming over May’s parade. U.S. employers added a meager 266,000 positions last month—far short of the one million expected—and unemployment rose to 6.1%, rather than falling. The deceleration in hiring is likely due to a shortage of available workers, which, although temporary, could impact economic momentum.

In other words, we’ll take the market gains but our bullishness is restrained.

On a total return basis, the Dow is up 13.5% through Thursday, while the broader S&P 500 has gained 12.4%. The MSCI EAFE index, a measure of developed international stock markets, has returned 8.0%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.49%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has fallen 2.3% this year.

Yellen Inflation Gaffe

Journalist Michael Kinsley famously suggested that a gaffe is when a public figure inadvertently tells the truth. That canny interpretation came to mind this week after Treasury Secretary Janet Yellen, who as Federal Reserve chair was fairly tight-lipped, opined that “interest rates will have to rise somewhat to make sure our economy doesn’t overheat.”

Her comments caused a minor stir among traders, feeding a sell-off in tech stocks before Yellen swiftly walked back her remarks, saying: “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it.”

Yellen’s not the only one ruminating on inflation. According to one report, mentions of “inflation” during corporate earnings calls this month have tripled year-over-year.

Next week, the headline Consumer Price Index (CPI) report for April arrives—and we expect to see a sizable jump. But as we’ve explained before, figures like this are resurging so dramatically  due to the lows of last year’s pandemic. Our take? Next week’s inflation bump will be more noise and static with very little signal.

‘Growth Problems’ Hamper Full Recovery

Automakers are sounding the alarm about the global semiconductor shortage as cars are flying off of lots at the fastest pace since 2005. Low borrowing costs and robust household balance sheets are motivating drivers to upgrade their rides, with companies like General Motors forced to triage production to adapt to the competing dynamics.

Supply-and-demand kinks are becoming commonplace in some sectors. The torrid housing market has left homebuilders racing to meet consumer demand but lacking the material to do so. Lumber prices are reportedly rising every week at Home Depots across the country. Meanwhile, a relative scarcity of poultry and pigs at a time when in-person dining restrictions are easing has caused price hikes at restaurants like KFC, Wingstop and Buffalo Wild Wings.

One counterintuitive pandemic-related shortage? Workers. Even with unemployment extremely high compared to pre-pandemic times, employers in manufacturing, restaurants and construction are reporting hiring difficulties as some workers find their stimulus and unemployment checks generate more income than a 40-hour-per-week job, while others are wary of venturing back out into the workplace with COVID-19 infections still high in some areas.

For our part, we’ll take these supply-driven growing pains over recession-like headwinds based on low demand. These shortages are symptomatic of a healthy recovery that still has a ways to go.

Sell in May and Go Away?

With the arrival of spring comes the old saw that investors should “sell in May and go away.”

The theory is that stocks don’t perform as well between May and October as they do during other months, so investors should sell their holdings and park the proceeds in cash for six months to avoid downturns. Then they buy back in November and remain invested through April, when markets have historically tended to do better.

Simple in theory, it is neither sound nor profitable. Consider that, over the past decade, the maneuver only worked once, in 2011, but those who continued to follow the Sell-in-May “strategy” missed out on positive, better-than-cash returns in each of the following nine years.

Note: Table shows returns of Vanguard’s 500 Index and Prime Money Market funds over the past 10 years, covering the period from 5/1 to 10/31 each year (or from the first May trading day through the final October trading day in a given year). Sources: Vanguard, Adviser Investments.

Selling on the flip of a calendar invented in 1582 seems both unnecessary and arbitrary. We prefer a quantitative process for making changes to portfolio allocations.

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Financial Planning Focus

Five Ways to Pay Down Debt

Debt isn’t a dirty word—far from it. In fact, borrowing money and carrying some debt can help you establish a credit history and reach longer-term financial goals like buying a car or owning a home. The important part of debt management is planning: Are you tracking it and do you have a plan for paying it off?

Keeping tabs on debt is arguably the simpler of the two tasks. Creating a basic spreadsheet with your current debt obligations and their terms, annual percentage rates and balances is an excellent start. It’s helpful to separate your debt into long-term (five years and more) and shorter-term or revolving (think credit cards). And websites and apps like Credit Karma or Mint.com can help you track debt successfully so payments are made on time.

Paying down debt is a trickier undertaking that requires a strategic approach. These are a few of the smartest ways to get the better of debt:

  1. The Snowball Strategy. This approach calls for zeroing in on the smallest balance on your debt inventory and focusing your excess cash there. When that item is wiped off the books, move on to the next-smallest and work your way up. The snowball strategy allows you to start small and build on your success over time. But, remember, going small means it will take you longer to attain freedom from debt.
  2. The Avalanche Method. Proponents of the avalanche strategy identify their highest interest-rate debt and start chipping away at it. From there, they work their way down the line. The avalanche method can wipe away your total debt faster than the snowball method, but there are fewer “small wins” along the way. This plan requires resolve and consistency, but it pays major dividends in the form of less interest paid to your creditors.
  3. A Straight Refi. Refinancing—essentially repackaging existing loans with better terms—is a common way to clean up your balance sheet on everything from credit cards to much larger debts. With interest rates at historic lows, mortgages and student loans are two of the best candidates for a refi. This option offers flexibility on how much you pay and how often. For instance, you might try for a lower monthly payment to free up money for your emergency fund, or keep your payment the same but reduce the term (and the overall interest paid) by a couple of years. Refinancing is a handy option—if you have a good enough credit history to qualify for better terms.
  4. Roll it Up. Consolidating multiple smaller debts into one large loan is a common approach for paying down credit cards and can also work for other types of debt—an excellent option if you have assets to use as leverage. For instance, if you have $200,000 of equity in your home and $50,000 of credit card and outstanding grad school debt, you might consider taking out a home equity line of credit (HELOC) allowing you to roll those smaller debts into one payment with a lower interest rate. Personal loans, which are not secured by an asset, are another way to roll up debt—although personal loans tend to come with higher interest rates than other approaches.
  5. Pay Minimums and Invest the Rest. A final way to approach debt management is to pay the monthly minimums (assuming interest rates remain low) for a defined period and put excess cash toward saving and investing. This method requires cash flow, planning and possibly expert advice. The key is to make sure your investments are growing faster than your debt. For instance, if you refinance student loans at a 2.5% interest rate and pay them regularly, you can then direct more of your salary toward maxing out tax-deferred 401(k) contributions. If you have cash left over each month, put it into a diversified brokerage account. Over time, the growth of those investments should exceed 2.5%—a much more efficient use of resources than being prematurely debt-free. You’ll need to pay your debt down at some point, but in the meantime, you can benefit from the compounding interest from your investments.

Which method should you choose? The one that keeps you on track to meet your financial goals.

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Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

No trades this week.

AIQ Tactical Global Growth

Sold SPDR S&P Bank ETF (KBE). Bought Fidelity MSCI Real Estate Index ETF (FREL).

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical Multi-Asset Income

Bought iShares JPMorgan USD Emerging Markets Bond ETF (EMB) with proceeds from cash.

AIQ Tactical High Income

No trades this week.

Adviser Investments’ Market Takeaways

In this week’s Market Takeaways, Research Analyst Liz Laprade looked at the Sell-in-May fallacy, while Vice President Steve Johnson discussed a slump for some previously high-flying tech names.

Looking Ahead

Next week brings a relatively light slate of informative data but we’ll get useful reads on small businesses, job openings, inflation, retail sales and consumer sentiment.

As always, you can visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.


Please note: This update was prepared on Friday, May 7, 2021, before the market’s close.

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Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.

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