May 3, 2020
US stocks finished their biggest monthly rally this April since 1987. The market rose 12.7% over the month, cutting the coronavirus-driven losses on the S&P 500 to about 10 per cent year to date, despite an economic shock far greater than the financial crisis a decade ago.
Some investors have expressed doubts about whether the rallies have further to run but are reluctant to bet against the massive interventions by central banks and governments around the world.
The rally in equities is not driven by fundamentals but by the liquidity support from the Federal Reserve.
The rally has been led by the tech sector that dominate the US stock market. Amazon and Netflix have both gained more than 40 per cent from their mid-March lows, benefiting from the shutdowns around the world that have kept billions of people indoors, reliant on home delivery and streaming entertainment.
A big gap between signals from the commodities and bond markets, which indicate expectations for a long period of low growth and stocks, which are pricing in a strong rebound for economic growth and corporate earnings. It is a tug of war between central bank policy and stock fundamentals. Right now, policy is winning.
Howard Marks of Oaktree recently said on CNBC “We’re only down 15% from the all-time high of February 19, and it seems to me the world is more than 15% screwed up.
“It took seven years to get back to the 2000 highs in 2007,” Marks told CNBC. “It took five-and-a-half years to get back to the 2007 highs in late 2012.”
“Is it really appropriate that, given all the bad news in the world today, we should get back to the highs in only three months? That seems inappropriately positive,” he added.
So, does the Halloween Indicator actually work?
Looking at S&P500 monthly returns from 1928 to present we can see that November — April Returns are on average 5.1% while May — October returns average out at 2.1%
An academic paper by Jacobsen and Bouman from 1998, which was updated in 2009 finds that this inherited wisdom is true in 36 of the 37 developed and emerging markets that they studied. The ‘Sell in May’ effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694.
So, what is the lesson of this? Should investors follow every investing adage that they hear? No, hopefully your take-away from this piece is that most ideas that are testable should be tested. It took less than fifteen minutes for me to download the monthly data and study this effect. While returns are indeed lower over the summer half of the year, there is a general positive expectation associated with investing in stocks. If you want to have a handful of winning investment rules, the best way to get them is to download some stock market data from the internet and test your ideas.