Spring has officially sprung; unfortunately this time of year can also mean choppy conditions for the stock market.
There is an investment phrase "sell in May and go away," based on the assumption that between May and September markets have lower returns than in the winter period. Over the past three years, this has definitely been the case but this isn't an investment strategy you can count on every year. Looking back over a 30-year period, it becomes more of a flip of the coin, and not something investors can bank on.
Events in the past three years have triggered lower markets in the spring and summer, followed by a good rally into the fall. Therefore, we have to take this trend into consideration. The volatility, however, was not random; in 2011 the U.S. debt ceiling fiasco caused major issues. In 2012, the market was jittery over European economic issues and last year we saw a drop after the U.S. Federal Reserve suggested the possibility of reducing stimulus, which caused interest rates to go up.
There are a few key indicators warning us to be cautious. The markets have had a significant rally over the past seven months and as we know, the markets generally enjoy a breather from time to time. Mortgage refinancing rates in the U.S. are showing lower readings, which is a concern, and some initial reports are suggesting that manufacturing in the U.S. might not be as active as originally anticipated. There has been slowing economic data due to severe winter weather in the U.S., so the next few weeks will be crucial in really understanding if a new trend is forming or if it was indeed due to the cold snap.
Although the S&P 500 recently reached a new record high, we also believe that trying to squeeze the last five percent out of a rally isn't a good idea. In my opinion, it is important to be patient as an investor and the key to navigating softer periods is to have a strategy to get defensive when the time comes. This could mean taking some profits on stocks that have shown impressive growth or selling positions that have not participated in the rally or are down in value. I still believe we are in the middle stages of a U.S. bull market and there is a great deal of room for upside growth over the next few years. Therefore it is important not to panic if a market correction does present itself. I feel holding a little extra cash in your portfolio is prudent in 2014 as we head into this seasonally weak period.
While the "sell in May and go away" strategy has worked in recent years and may indeed prove to be correct again this year, I still remain unconvinced that it is a good long-term investment strategy, as there have been many years where it didn't work out. Most importantly, make sure you have an active investment strategy because in these markets things can change quickly and you need to adapt. I can't stress this enough.
Lori Pinkowski is a portfolio manager and senior vicepresident, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Friday on CKNW at 5:35 p.m.
