April showers bring May flowers
Now that May has arrived there should certainly be an abundance of flowers sprouting up all around New England if this cliche is true. Many sayings seem rooted in truth, but we suspect many popular expressions are formed to make us feel better when things aren’t so great. Does a bird pooping on our head really mean good luck is soon to follow? Likely not, but perhaps it makes us feel a little better while we seek out the nearest shower. “Sell in May and go Away” is a popular expression with the stock market crowd. It’s an expression based on the stock market's historical returns from May through October. The origin of the expression can be traced back to London. Bankers and merchants would flee the city for the countryside during the hot summer months. “Sell in May and go away, and come back on St. Leger’s Day (mid-September)” was the popular phrase. Our country’s adapted version of the “sell in May” expression is rooted in truth. Since 1950 almost all of the returns in the U.S. stock market have been earned from the November through April period. On average the market return during this period is about 8%, vs. 1% for the May through October period. When we dig a little deeper we uncover the major contributor to this differential are market crashes, not a consistent pattern of a performance differential during these periods. Specifically, the 2008 credit crisis occurred in August, the 2001 terrorist attacks were in September, and the 1987 crash was in October.
We are not dismissing seasonal patterns of stock market returns. In our stock market forecasting matrix, we have a seasonality factor. This factor is what we refer to as a secondary, or confirming factor. If it confirms our primary factors forecast, then we have a higher confidence in that forecast. When it contradicts the primary factors forecast, we take note of it but don’t necessarily override what our primary factors are telling us. Growth of operating earnings is a primary factor for us. This year’s consensus is that operating earnings will increase 19.8% this year (largely due to TJCA reducing tax expenses), up from 11.2% last year. 2019 consensus growth estimates are 10.3%. Long-term trend growth rates for operating earnings are 7%, so current growth rates are well above trend growth rates.
Valuation is another primary variable. The S&P 500 has retreated from a high of 18.6X to 16.2X earnings. While not cheap, this puts valuation at fair value in an economic environment of strong growth with low inflation. We also continue to be in a bull market phase. Longer-term moving averages remain above shorter term moving averages. These primary factors continue to form our opinion that stocks market will move higher over the remainder of the year.
The S&P 500 has been jumping around quite a bit this year and currently is slightly higher than where it started the year. So while we expect the volatility to continue, we also expect stocks to eventually end the year higher. As another popular saying goes, “no pain, no gain.” The GreenPort Team