Will Investors Sell in May and Go Away?

The Dow Jones Industrial Average (Dow) gained 0.93%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.97%, the Standard & Poor’s 500® Index (S&P 500) rose 0.95% and the NASDAQ Composite Index (NASDAQ) tacked on...

May 05, 2014    |    By Mike Schwager

Performance for Week Ending 5/2/2014:

The Dow Jones Industrial Average (Dow) gained 0.93%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.97%, the Standard & Poor’s 500® Index (S&P 500) rose 0.95% and the NASDAQ Composite Index (NASDAQ) tacked on 1.19%. Sector breadth was positive as 9 of the 10 S&P sector groups finishing higher.


Index* Closing Price 5/2/2014 Percentage Change for Week Ending 5/2/2014 Year-to-Date Percentage Change Through 5/2/2014





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS 4/28/14 - 5/2/14

The major market indices finished the week solidly higher on further signs the U.S. economy is gaining traction following the weather induced soft patch earlier in the year. Adding to the positive tone was the better than expected trend to first quarter earnings, a flurry of merger and acquisition (M&A) announcements, and a favorable assessment of the economy by the Federal Reserve (Fed).

Payroll Report
On Friday, the Labor Department reported that April nonfarm payrolls (NFPs) rose by 288K, well ahead of the 218K expected by economists. The gain in NFPs was the largest since January 2012. The unemployment rate dropped to 6.3% (from 6.7%) while private payrolls—which filter out government hiring/firing—rose by 273K. Upward revisions to the February and March data added 36k to nonfarm payrolls. Over the past three months, the average monthly change in nonfarm employment has jumped to 237K, the highest since March 2012. The better jobs data appears to be signaling a rebound in the labor markets, however, it also seems to be raising concerns that the Fed could tighten policy a bit sooner than expected. While the strength in the employment data suggests that the Fed will continue to taper its bond buying activity, it will likely take many months of strong data for the Fed to change the timeline for policy tightening.

FOMC Meeting
The two-day Federal Open Market Committee (FOMC) meeting concluded with the committee announcing another $10B/month reduction in their quantitative easing (QE) program. The markets more or less yawned at the announcement as this outcome was well telegraphed and many investors have long concluded that tapering is on “autopilot” (i.e. reductions of $10B/ month are expected to occur at each of the next several FOMC meetings). While there was no follow up press conference at the conclusion of the meeting, the after meeting communiqué had a generally upbeat tone. The Committee noted that "economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions." They also noted that "household spending appears to be rising more quickly," but continued to describe labor market indicators as "mixed,” but on balance showing further improvement. Lastly, the
Committee retained their pledge to keep rates low for a “considerable time” after the bond buying program ends.

Investor Sentiment Stuck in Neutral
The American Association of Individual Investors (AAII) reported that bullish sentiment in the most recent period fell to 29.8% while bearish sentiment rose to 29.5%. Interestingly, Neutral sentiment rose 40.8% - the highest reading since April 2005. The surge in Neutral sentiment suggests a high level of uncertainty in the market place as investors ponder the impact of tapering, the outlook for the economy, valuation levels, and concerns over whether companies will be able to deliver earnings growth. This also likely explains why the markets have been stuck in a “holding pattern’ over the past few months.

One of Wall Street’s long standing adages is “sell in May and go away”. This reflects the markets tendency to underperform in the May through October period. According to BofA/Merrill Lynch, since 1928 the May-October period is the weakest six-month period of the year for the S&P 500 with an average return of 1.93% while the November-April period is the strongest six-month period with an average return of 5.08%. Although the May-October period is not down on average, the returns tend to be lackluster and the risk of a 20% pullback has been highest during this 6-month period – stay tuned.

Economic Roundup
In addition to the better than expected April payroll report, other key economic data continued to signal a stable to improving economic environment. The Institute for Supply Management (ISM) reported that manufacturing activity strengthened during April while the National Association of Realtors reported that pending home sales rose by 3.4% in March – the first gain in nine months. Pending sales typically lead existing home sales by one or two months suggesting existing home sales could stabilize or turn higher in the coming months. Elsewhere, the Commerce Department reported that personal spending in March rose by 0.9%, solidly above the 0.6% gain expected by economists and the biggest gain in almost 5-years. Personal income rose by 0.5% also besting expectations.

Investors shrugged off the much weaker than expected Q1 GDP report. The Commerce Department reported that GDP growth in the first quarter came to a screeching halt, growing by only 0.1%. For the most part investors ignored the data as 1) expectations heading into the report were very low, 2) weather was obviously a factor during the quarter, and 3) GDP is a “backward” looking data point. More importantly will be how much GDP rebounds during the current quarter. According to Bloomberg, economists are currently forecasting 3.0% growth for the second quarter (with some forecasts are as high as 4%-plus).

Q1 Earnings Summary
First quarter earnings reports continue to trend at a better than expected pace. Through Friday 376 members of the S&P 500 have reported quarterly results with overall earnings up by 5.1% (Note: when all is said and done, analysts are forecasting Q1 earnings growth of +4.6% which is solidly above their forecast of just 1.0% growth at the beginning of April). Of the 376 companies, almost 72% have beaten expectations while just under 19% have fallen short. The current “beat” rate remains solidly above the long-term average of 63%.

The Week Ahead
With the first quarter earnings calendar winding down and the economic calendar relatively light, the focal point of the upcoming week is likely to be Fed Chair Yellen’s testimony to the Joint Economic Committee on Wednesday. Yellen will address monetary policy and the outlook for the U.S. economy. While the Fed Chair isn’t likely to break any new ground, in light of the strong payroll data investors will listen closely for any new clues on the timing of tighter monetary policy. On the data front, Monday’s release of the ISM nonmanufacturing data and Friday’s JOLTs report will be closely watched. While the latter has typically gotten little fanfare, there is a growing interest in the data after Fed Chairwoman Yellen mentioned that she pays close attention to the figures. Quarterly earnings reports will continue to wind down with 78 members of the S&P 500 scheduled to report. Other events of interest include policy meetings by both the European Central Bank (ECB) and the Bank of England. While both are expected to leave current policy unchanged, there has been growing speculation the ECB is preparing to initiate a quantitative easing effort, although most believe this is not likely to happen until their June 5 gathering.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm’s headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

American Association of Individual Investors (AAII) is a non-profit, membership-driven investor education organization. The American Association of Individual Investors (AAII) was founded in 1978 by James Cloonan. The AAII's mission is to teach individuals to manage their own portfolios and to beat average S&P 500 returns, while taking on lower-than-average levels of risk. AAII also publishes the results of its weekly investor confidence surveys that are based on its members' feelings about where the stock market is headed.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no gua rantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.

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