Soothsayers Soliloquy “Sell In May…” Is Just Plain Silly in ZIRP Environment

Excerpt below courtesy of  this a.m.’s Sight Beyond Sight notes to newsletter subscribers. Today’s edition from Rareview Macro LLC also includes the following talking point: “The True Pain Trade is Not SPX 1920-1950 but Beyond 1950”

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

Sell in May and Go Away?

Historically, we despise the advice to “sell in May and go away”. The main reason is that very few of the people who make that argument do not actually factor the following considerations into their analysis:

What index are they selling? There is a big difference between the Dow Jones and S&P 500, especially when you take into consideration the index rebalances over time.

When does the period actually begin and end? By that we mean there is a big difference between selling on May 1st and May 15th.

What happens if you just remove September from the equation? September is usually the weakest month of the year and the month that has the biggest impact on a risk-adjusted return basis, so if you take that out it makes a big difference.

What are the external factors? By that we mean was the market up or down going into May 1st. Or was the budget in deficit or surplus or are investor cash balances high or low? These factors all matter as well.

What are the real world implications? The analysis never takes into consideration taxes, transaction costs, where an investor would re-deploy the capital or what would happen if an investors circumstances change and they cannot buy back into the market in November.

All that said, we felt compelled this year to chime in with a couple of thoughts that we have not seen made in the market this time around, perhaps because most of the analysis has just focused on the period following the global financial crisis.

The most important detail this year left out of all the analysis we read was the fact that the United States has a zero interest rate policy (ZIRP).

Since 1950, the average annual yield on a 3-month U.S. Treasury Bills was ~4.7% vs. ~0.01% currently.

When cash yields are close to 5%, stocks have to return ~11% per year to justify their additional risk based on the historical risk premium of 6%.

With 0% yields, such as now, stocks only have to return 6% per year to match that historical risk premium.

There have been four (4) periods in the last 80 years where the US has had a ZIRP: 1933 to 1947, 1954, mid-2003 to mid-2004, and 2009-2014.

As you can see below, the average of ALL May to October periods when the US had a ZIRP was +8.33% in the Dow Jones Industrial Average (DJIA). This is stronger than the +8.08% average return by the S&P 500 during the November to April period. While not an apples-to-apples index comparison the analysis is noteworthy.

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