Why Merrill Lynch Says 'Sell in May and Go Away' Is Bad Advice in 2019

It’s that time again when the school year is about to let out and families start thinking about summer vacations and what to do to occupy the time for their kids. It makes it hard to ratchet up work, and investors tend to be focused on more dominant themes as well. That’s why the phrase “Sell in May and go away” comes up every year.

While the market loves adages and predictable patterns, selling in May isn’t always a good strategy. In 2019, investors are seeing that earnings have held up far better than originally expected. Gross domestic product was north of 3%, and unemployment is at a 50-year low of 3.6%. Now the China trade war of tit-for-tat tariffs is coming back into the mix, and Iran has decided to fight back by backing out of part of their nuclear agreement signed in 2015. After such strong gains for the S&P 500 and Nasdaq indexes year to date, there are plenty of reasons, even if it’s just a good time for profit-taking, that selling in May might sound rather appealing to the public.

The technical strategy team at Merrill Lynch is telling its clients that perhaps selling in May is not the best idea in 2019. While admitting that the May to October time frame is the weakest period of the year for the markets historically, they did note that the S&P 500 is up 64.8% of the time, with an average return of 2.04% (and a 2.95% median return). The current view is that this is actually not a down period. The team believes that seasonality in 2019 supports a summer rally for stocks.

By comparison, the period between November and April is the strongest six-month period historically, with stocks being up 71.4% of the time with an average return of 5.11% (and a better 5.39% median return). Even with the horrible correction in the fourth quarter of 2018, the S&P 500 still somehow managed to generate a positive return of 8.63% in that time.

Merrill’s report from Stephen Suttmeier and Jordan Young outlined how and why in 2019 it might really be a time to look for bargains in the short term. There is even a note about how the May through October period is back-end loaded. The report said:

Investors also often talk about a summer rally and S&P 500 seasonality back to 1928 supports the case for a summer rally. Monthly seasonality suggests selling in the strong month of April, buying in the weak month of May and selling in July/August ahead of the weakest month of September. … June-August is the second strongest 3-month period of the year for the S&P 500 and is up 63.7% of the time with an average return of 3.02%. S&P 500 seasonality supports the case for a summer rally. It is not sell in May and go away but rather a buy in May and sell in July/August pattern. … As highlighted above, the second strongest 3-month period of the year is June August, which is up 3.02% on average, and the weakest 3-month period of the year is August-October, which is down 0.06% on average. Both of these 3-month periods are between May and October. This means that the weaker May-October period is back-end loaded as seasonality suggests a sell in July/August rather than a sell in May pattern.

The report went on to show that the third year of each presidential cycle tends to be the best year of the four-year cycle.

The timing of the call may have been a day ahead of a 40-point drop in the S&P 500 and a 400-point drop in the Dow Jones industrials, with an even larger percentage drop in the tech-heavy Nasdaq Composite Index. That said, with bargain hunting themes throughout for investors, the team’s table and charts showed that the average correction on rolling six-month time periods is less than 8% on average (and barely down 5% on a median correction).

At this time, the S&P 500 is still down just under 4% from its highs put in over the past two weeks. The Nasdaq is down just over 4% over the same period. There have been more problems in some top Dow stocks, with several of its 30 components facing company-specific issues (e.g., 3M, Boeing, Caterpillar, Walgreens, Goldman Sachs) making for its loss to be about 5.2% from the peak put in back in October of 2018.

Note that Merrill also recently offered up three global growth picks with solid upside potential.

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