Sell in May and Go Away?


Is the US economy finally back to a "normal" jobs market? Unfortunately, not yet. At first blush, the employment report was much better than expected, but pessimists found plenty to highlight as well. First the good news: The economy created 288,000 jobs in April and there were upward revisions to the previous two months, amounting to an extra 36,000 jobs than were previously reported. Total monthly job creation over the past three months has averaged 238,000, an improvement over the past year’s pace of 190,000.

Additionally, the unemployment rate dropped to 6.3 percent, the lowest level since September 2008, but most of the decline had to do with a massive 806,000 reduction in the labor force, which pushed down the participation rate (the number of people employed or actively seeking employment) to 36-year lows of 62.8 percent. Still, while the monthly results on the rate might seem discouraging, the folks at Capital Economics remind us, “The labor force has increased by about 1.5 million over the past six months.”

As most know, the top-line unemployment rate only captures those who have a job or are actively looking for work. A broader measure of joblessness, which includes those who have stopped looking for work as well as people working part-time for economic reasons, fell to 12.3 percent, which is certainly an improvement 13.9 percent from a year ago, but still very high.

The ranks of the long-term unemployed continued to show progress, dropping by 287,000 in April to 3.5 million. Over the past year, the number of long-term unemployed has decreased by 908,000 and the median duration of unemployment dropped to 16 weeks, which is down from 20 weeks a year ago and half the amount of time it took to land a new job at the worst part of the jobs recession. Still, from 1994 through 2008, roughly half of all unemployed jobseekers found jobs within 5 weeks, which shows that the labor market remains far from normal.

There has also been concern about quality of jobs created during the recovery. Nearly five years after the end of the recession, job growth is still heavily concentrated in lower-wage industries. The food services and drinking places, administrative and support services (includes temporary help), and retail trade industries continue to lead private sector job growth during the recovery.

The addition of low-wage jobs is keeping a lid on average hourly earnings, which were unchanged last month and the annual growth rate of hourly earnings slipped back to 1.9 percent from 2.1 percent. Before the recession, wages were regularly growing at above 3 percent year-over-year. Wage growth and an increase in hours worked are the necessary components to help consumers feel confident enough to eventually pick up their spending.

What’s the bottom line? The labor market is improving, but we are not there yet, which may be why markets barely budged on the news. Or maybe it’s something else…could investors be thinking about the old trader’s chestnut, “Sell in May and Go Away” The market-timing strategy says investors should get out of stocks in May, avoiding the volatile spring and summer months; and then jump back in after October to enjoy an end of the year rally. There is some statistical evidence to back the adage. According to S&P Capital IQ (as cited in the Wall Street Journal), since 1977, the S&P 500 has averaged a total return, including dividends of 3.3 percent from May through October. That performance dramatically lags the Barclays Aggregate Bond Index, which has averaged a 7.6 percent gain during those same months for the past 36 years.

Skeptics brush aside the idea as a trading trap, warning investors to stick to their long-term game plans. After all, while the data may confirm a trend, in any year the results might change. Last year, the S&P 500 jumped 10 percent from May through October, so selling in May and going away would have been a terrible strategy. Bottom line: ignore the rhymes and stick to your diversified, balanced portfolio!

But there may be other reasons to consider taking a hard look at your asset allocation and ensuring that your stock position is not too weighty. Consider the front-page Wall Street Journal headline, “Retirement Investors Flock Back to Stocks,” which highlights new data from Aon Hewitt showing that stock investments accounted for two thirds of employees' new contributions into retirement portfolios in March, the highest percentage since March 2008! Um, contra-indicator, anyone? This could be a case where retail investor enthusiasm may come at a market top.

After all, it’s been three years since the S&P 500′s last correction began. On April 29, 2011 the S&P 500 started a long and volatile decline from 1363.61, which ended five months later (on October 4) and 19.9 percent lower (1099.23). Since then, there have been five pullbacks of more than 5 percent but less than 10 percent. The biggest of those declines was a 9.9 percent drop that lasted from the April 2, 2012 close through June 1, 2012.


  • DJIA: 16,512, up 0.9% on week, down 0.4% YTD
  • S&P 500: 1881, up 1% on week, up 1.8% YTD
  • NASDAQ: 4123, up 1.2% on week, down 1.3% YTD
  • 10-Year Treasury yield: 2.59% (from 2.66% a week ago, lowest yield of year)
  • June Crude Oil: $99.76, down 0.8% on week
  • June Gold: $1302.90, up 0.1% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.68 (from $3.52 a year ago)


Mon 5/5:

Pfizer, AIG

10:00 ISM Non-Manufacturing Index

Tues 5/6:

Disney, Whole Foods, Groupon

8:30 International Trade

Weds 5/7:

A-B InBev, Tesla, AOL, Zillow

8:30 Q1 Productivity

10:00 Yellen Testifies before Joint Economic Committee

3:00 Consumer Credit

Thurs 5/8:

News Corp, CBS

7:30 ECB/BOE Interest rate decision

Chain Store Sales

8:30 Weekly Jobless Claims

10:00 Yellen Testifies before Senate Budget Committee

Fri 5/9:

Ralph Lauren

10:00 Wholesale Trade

10:00 JOLTs