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Market Update 5/4/2021

Today was an interesting day in the market. It started off that there was a lot of selling going on. The markets were taking a beating. It’s coming back a little bit now, but I thought it was interesting because a lot of the earnings that have come out right now have been really, really good. And the guidance for the future has been really, really good. So why is the stock market not really rising? As a matter of fact, it seems to be, even though we’ve had some pretty good days and we’ve had some new highs, it seems to want to go down. Gravity seems to want to force it down. So, should we be selling into this or should we just hang on? Well, before we get into that, there was always a myth in the stock market world that says to “Sell in May and go away.” For those of you who may not have heard that, it has been around for a long time. And basically how did this come about? How did the phrase come about as it relates to the stock market? I was reading an article by David Bartosiak, who is from Zacks and he’s saying that the phrase, “sell in May and go away”, might’ve started in old England when the saying was really, “Sell in May and go away, come back on St. Leger’s Day.” St Leger’s Day was a time when there was a big horse race called the St Leger Stakes horse race. It was a bunch of wealthy Londoners who would go away from the city in May to get away from the heat and they would come back in November when this race started. So American investors have kind of adopted this into the stock market, basically saying, sell in May and go away.

So, I was thinking here, is that the smartest thing to do? In this article, David Bartosiak is giving statistics as to whether it makes sense or not. So one of the things is, is that the summer months usually have better returns in the stock market than the winter months. Don’t really know why that is, but it is. What Bartosiak did, was he went back 28 years using returns on the S&P 500 in order to showcase the gains in the losses. Over the last 28 years, he said that the month of May itself, has returned on average about 81 basis points, or a little bit more than eight tenths of 1%. Now that’s really about average for what the market did over the last 28 years, because if you look at the returns, they’ve been about 10.4% per year, and it comes out to pretty close to what the month of May has done.

If you take the eight periods over the last 28 years, where during the summer months, from May to November, when the market was down, the market was down only about 28 and a half percent of the time. That’s eight months out of 28 periods. But it also implies that 71 and a half percent of the time the market was up. However, the down is usually a little bit higher than the ups. Especially because in the last 28 years, you had the ’08 correction that was pretty big, close to 30% on the S&P 500 and we went through that real estate crash. But be that as it may, it happened. So we’ll obviously leave that in there. So if you do the calculations, what you could expect is about a 2.47% return based on those numbers that we just gave you.

I’m not a statistician and for all your statisticians out there, you may say, hey, there’s not a big enough sample, but we’re going to go with it anyway. So your expected return is about 2.4%. Now, here we are today and we have had the stock market that has been rallying. As I said before, the S&P and the Dow have gone up to record highs. So again, what’s going on here? Well, I would tell you that there’s actually two reasons I think that the market is still not doing what I think it should do with the earnings reports that we’re talking about. The two reasons are inflation and a computer chip shortage. Now, inflation is starting to come about all over the place. If you just look at the price of oil, the price of food, I was looking around a little bit more and commodity prices are on a tear. Lumber is up a lot. Steel is up a lot.

I was looking at some of the other earnings and Procter and Gamble, for one, came out and said that they are going to have to raise prices in September. It’s simply a matter of their raw costs going up and they’re just going to have to pass it along. This is a household goods company, they make Gillette razors, and Tide detergent and diapers and tampons. It’s the same thing that Kimberly Clark said just a little bit ago, that they’re also going to have to raise prices. One of the people who is the chief operating officer for Procter and Gamble and has been around for 33 years, said, and this is from an article in the Wall Street Journal, “This is one of the bigger increases in commodity costs that we’ve seen over the period of time that I’ve been involved with this, which is a fairly long period of time.”

Inflation is happening. What happens when inflation goes on in the United States? The Fed tries to fight it is by raising interest rates. The Fed so far has said that they we haven’t come fully back from the COVID issue, although I do think we’re on the downside. Interestingly, today, when the market really kind of dropped a lot today, and we’re currently not down nearly much. It’s almost 12 o’clock. So we still have about another hour to go in the market. When Janet Yellen, in an interview with the Atlantic that was broadcast today, was quoted as saying that “Big spending plans by the US government could mean that interest rates will have to rise a little bit to make sure our economy doesn’t overheat.” The market went down by quite a bit. So no question that inflation will slow down the market a little bit, because interest rates will slow it down. This is not something that I’m worried about yet.

The second part of the reason that the markets are not doing as well as we thought they probably should do with all the great returns that we’ve had so far, is that there’s a chip shortage going on in the United States and all over the world. This chip shortage is causing a problem for a lot of companies. One of which is Ford. Ford just came out with earnings that were as good as you could possibly get, but their guidance was a little tepid. So people were a little confused by it and the reason is, is because, according to CNBC, they’re going to have to cut out some factories for a while. They’re going to have to shut them down. Approximately five different factories in the US are going to have to shut down because they just can’t build the car without the chips. Their best-selling and most profitable truck is the F-150 series. According to CNBC, there are about 22,000 trucks that have been built without chips and Ford can’t sell them until chips are installed in them. As a result revenues are going to be down, certainly for a while. But Ford did say, according to CNBC that they think that the chip shortage should be ending by probably the end of the second quarter, although the impact will be felt a little bit longer.

I don’t think these are long-term problems. I think that most of this is temporary. I don’t think that the stock market is going to take it on the chin when you’ve got lots of money that’s sloshing around the economy, because of all the checks that have been put out by the government, the $1,400 per person. It’s a lot of money going into the economy. Things are really good, with the exception of the computer chip shortage. The bottom line here is I think we’re good.

Going back to Mr. David Bartosiak from Zacks, what he says, and I agree with him, is when you hear, “sell in May and go away”, ignore it. I say to ignore it right now, because I’ve got Mr. Bear over here, he’s my little Chicago bear and I can tell you that he is still hibernating. He may be toward end of his dreams, but right now he’s still hibernating. I would stay with it. I would stay with the market. Mr. Bartosiak says, “Staying long and strong in the market is the best path toward long-term asset appreciation.” Over the years, the adage of “Sell in May and go away” might have worked a few times, but in the long run, never bet against the US stock market. So Mr. Bear, you can continue to sleep. Until next time.

Steve Wolff is a Managing Partner at WWM Financial in Carlsbad California. Steve can be reached at 760-692-5190 or contacted with the following link. Contact Link

 

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

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