“Sell in May and Go Away” is an investment advising investors to sell their investments in May, wait out the summer months by the beach before reinvesting in November.
In theory the existence of such a seasonal pattern should be quickly eroded as investors try and front run selling by other investors. In turn reducing the prevalence of the evidence to support the adage. Analysis by Rothko Research looking at major equity indices over a period of several decades finds mixed results.
That being said there is plenty of convincing evidence and arguments to suggest that 2020 could be one of those years where the adage holds true. Here I outline three reasons why this could be the case:
Follow the money
There is a strong historical relationship between money supply (as measured by M2) and annual changes in the S&P 500. As money supply grows (the result of easing by the Federal Reserve and increased demand for credit), risky assets tend to be bid up as too much money chases too few assets. But importantly it operates with a lag. Based on analysis by Nordea there is a lag of 252 trading days between a change in M2 and the impact of that liquidity on the S&P 500.
Right now (this week) the S&P 500 is likely to see liquidity dry up and go into reverse – perhaps moving lower by 25%-30%. Only later in 2020 or early 2021 is it likely to bottom. Historical trends suggest that the wall of liquidity unleashed by the Federal Reserve’s easing policies due to covid-19 will flood the US equity market making 2021 a potentially strong year for asset prices.
China and the US escalate their battle of words and deeds
Authority figures and PR executives have long known the value of deflecting attention. Directing the public’s anger to someone else, preferably someone or some country a long way overseas is the idea strategy to divert gaze from any embarrassing shortcomings.
What better idea then (ahead of the November Presidential election) to deflect attention from any domestic leadership shortcomings related to covid-19 than blaming someone else, especially the country where the virus is understood to have originated from, China.
According to US political commentator Karl Rove, “If the issue is who is tougher on China, this is going to be a Trump victory.”
The two countries are likely to clash economically and financially. First, over the doomed trade deal and second over the dollar yuan exchange rate. A sharp weakening in the yuan from current levels could set the stage for further economic conflict between the two countries and set off an exodus from risky assets.
Corona Wave 2.0
Many will now be familiar with the scale of the 1918 Spanish Flu, in particular the second more deadly wave of infection that hit during late 2018.
According to the US Centers for Disease Control and Prevention (CDC) the rapid spread of the coronavirus in Latin America (now experiencing their autumn/winter) raises the possibility of a second round later in 2020 just as the northern hemisphere enters winter.
The rebound in equity markets since late March is built, at least in part on investor expectations that the worst is now behind us, cases and deaths have peaked and the economy will gradually reopen.
Governments, companies and people may now be better prepared than they were a few months ago, but that doesn’t mean that a prolonged period of re-shuttering and re-opening of the economy won’t be enormously disruptive.
Related article: Alphabet soup
Retail investors getting spooked
No fee trading platforms such as Robinhood have seen a spike in account applications over the past few months. The combination of boredom, government corona related payments and the abandonment of all sports (and associated betting) has led a flurry of new retail investors into the market.
No doubt sitting pretty at the moment, praising their trading skills and pondering doing it full-time. Beginners luck of course my turn sour when the s*** hits the fan. A change in fortunes could mean that markets quickly give up their gains as sentiment shifts to disappointment.
Related article: The best performing commodity of 2020 is…not gold