“Sell in May and go away.” This adage has been around for decades. From the perspective of a U.S. investor, tradition holds that they sell their stocks in May and stay away from the market until the end of October. Like many stock market adages, I remember being introduced to “The Best/Worst Six Months” in The Stock Trader’s Almanac, as it relates to the Dow Jones Industrial Average. I subsequently found there was a noticeable period of seasonal strength and weakness not only for the large caps, but also for mid and small caps, as well as developed international and emerging markets.
However, history shows (for it never guarantees) that an investor was better off rotating into defensive sectors of the market during this seasonally soft six month period than they were by either holding the broader benchmark or leaving the equity market altogether. For instance, since 1995, the S&P SmallCap 600 Consumer Staples and Health Care groups posted average price gains of 5.3% and 5.4%, respectively, to the S&P SmallCap 600’s average rise of 2.5%.
Some investors are concerned that small-cap stocks are vulnerable to a stumble during the seasonally soft May through October period ahead, since they have outpaced large caps for an abnormally long period of time. Since 1979, small cap stocks beat large caps in 61% of the years. However, the S&P SmallCap 600 outpaced the S&P 500 in 12 of the past 15 years (80% of the time), and is currently leading the “500” year to date through April 24. In addition, even though small-cap earnings are expected to grow by nearly 23% in 2015, the S&P SmallCap 600’s trailing operating P/E is trading at a 47% premium to the S&P 500’s P/E, versus its average 22% premium during the past 20 years. Plus, the Fed is expected to start its newest rate-tightening program sometime this year. Therefore, should you believe small caps face a challenging period ahead, you may want to consider this semi-annual rotation strategy. Like whitewater rafting, by allowing the market to take you where it wants to go, you may experience both a thrilling and rewarding ride.