As the end of April approaches, will 2023 be another year where the “Sell In May” strategy works? While no one knows the answer, historical statistics,…
As the end of April approaches, will 2023 be another year where the “Sell In May” strategy works? While no one knows the answer, historical statistics, current economic indicators, and technical measures suggest some caution is warranted….
This is an edited and abridged version of the original article to provide you with a fast and easy read.
An old adage says investors should “Sell May And Go Away” and historical analysis prove this as $10,000 invested in the market from November to April vastly outperformed that amount invested from May through October.
…Not every summer works out poorly, however. Historically, there are many periods where “Sell In May” did not work and markets rose. 2020 and 2021 were examples where massive Federal Reserve interventions pushed prices higher in April and subsequent summer months. However, 2022 was the opposite as April declined sharply as the Fed began an aggressive interest rate hiking campaign the preceding month.
As the end of April approaches, will 2023 be another year where the “Sell In May” strategy works? While no one knows the answer, historical statistics, current economic indicators, and technical measures suggest some caution is warranted….
Indicators Suggest Caution
In the latestBull Bear Report, I discussed that many indicators are undoubtedly concerning and suggest an “official” economic recession is likely. The inversion of the Fed Funds rate to the 10-year Treasury is the most inverted since 1986 (roughly 10-months before the 1987 market crash.)
Furthermore, the most recent release of the Philadelphia Federal Reserve Manufacturing Index showed a sharp plunge in sentiment, suggesting a more pronounced correction than earnings currently represent. Historically, such deep readings of the “Philly Fed” index were associated with harder, not softer, economic recessions.
However, in the short term, it is the technical price action that we pay the closest attention to. Such is because the price action represents the psychology of the market. Those technical indicators were the primary drivers behind reducing exposure to the markets in February and increasing again in March. The vertical lines represent each “buy” and “sell” signal over the last year.
While these signals are not timing indicators to “be all in or out” of the market, they have consistently provided good signals to increase and reduce exposure to equity risk accordingly. Those indicators suggest that investors may be well served to “Sell May” and return later.
The Fed Set To Hike Rates
While the technical indications may be enough warning on their own to reduce risk heading into May, it is worth remembering the Fed is set to hike rates again on the 5th. With each rate hike, we are getting closer to the Federal Reserve breaking something economically or financially. Such has repeatedly been the case throughout history and given the aggressiveness of the rate hiking campaign over the last year, a negative outcome would be unsurprising.
So far, the markets have weathered the rate increase much better than expected. However, most of those rate hikes have yet to work through the economic system. Furthermore, the economy has remained buoyed by the massive increase in money supply, which still supports economic activity but that support is also fading as the last vestiges of pandemic support programs end.
As we enter the traditionally weak summer months, we must note that the market’s bullish trend remains intact. However, as I concluded this past weekend:
“A correction should be acknowledged and expected. A 10% decline would lead to another retracement to the lows of the bullish trend channel, as noted above. If that support holds, that would be a logical place to add exposure to risk assets from a purely technical perspective.”
…If that support holds, that would be a logical place to add exposure to risk assets from a purely technical perspective…Could we be wrong to “sell May” and go away until later? It is certainly possible, and if such is indeed the case, we will add exposure accordingly when needed, however, being cautious heading into the summer may pay extra dividends.
The seasonal effect is very real and has been written about extensively in popular media (and to a lesser extent in academia), but relatively little has been written examining what may be the etiological factors behind this phenomenon. So this article attempts to briefly address the question: what are the causes of this phenomenon?
The inner trader in me is constantly worried and constantly thinking I should be trading Mr. Market’s schizophrenic mood swings. The “sell in May and go away” thesis has shown itself quite rigorous and valid over 50+ years, so it is hard to ignore but you really must analyze it further than 6 months risk-on (November through April), 6 months risk-off (May through October) like the stock traders’ almanac implies. Instead, you should break it down month by month to get a more detailed picture of how you should be trading, if you are a market timer.
There is a belief among many investors that excess returns can be earned in the market by owning stocks for only 6 months out of the year and sitting the rest of the time in interest-bearing Treasury securities. This market-timing strategy is commonly known as Sell in May and Go Away because the exit period is May. CXO Advisory took a look at “Sell in May” over the long-term to determine if this belief was fact or fiction.
Some market participants may be looking to heed the advice of the old market proverb “Sell in May and Go Away”. The question this article seeks to answer is whether this calendar effect is spurious, or whether this is something readers should heed.
The saying “sell in May and go away” infers that the stock market is seasonally weak from May to September and, as such, one should not own stocks during that period of time. As illustrated in the chart below, however, the stock market is not particularly bearish then. It is merely less bullish (i.e. the odds of the market going down vs. up are equivalent). That’s why “sell in May and go away” is not a good trading strategy. Let me illustrate that fact further in the 10 charts below.
The “sell in May and go away”, which] implies that the market’s performance is far worse in the six summer months than in the six winter months is the case with respect to US stock markets but what is the status in other countries? I have examined the patterns in the eleven most important stock markets in the world and found that it does, indeed, make sense to “sell in May and go away” in 9 of the 11 countries. In which two countries has it not been the case – at least until now? Read on for the answers.
One of the most enduring of Wall Street axioms – falling somewhere under “buy low and sell high” but above “greed is good” – is to “sell in May and go away” and, indeed, there appeared to be some truth to the saying. Between 1950 and 2012, the Dow Jones gained an average of 7.6% annually during the November-April period, but only 0.4% during May-October. Does “Sell In May and Go Away” still hold true as a viable investment strategy? Not according to my analysis. Here’s why.
By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…
The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.
Temporary help services employment continues a steep decline after a sharp post-pandemic rise.
Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.
The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.
The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.
Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.
As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.
Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.
The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.
Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.
The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.
From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250
Below is an explanation of how we got here with the labor market, which all started during COVID-19.
1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.
2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.
Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.
3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too
Total employment data 4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels.
FromBLS:Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.
Here are the jobs that were created and lost in the previous month:
In this jobs report, the unemployment rate for education levels looks like this:
Less than a high school diploma:6.1%
High school graduate and no college: 4.2%
Some college or associate degree: 3.1%
Bachelor’s degree or higher:2.2%
Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.
Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month
Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush.
What happened?Let's take a closer look.
On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.
Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.
Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K, a 124K revision, which was the biggest one-month negative revision in two years!
Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.
In the past month the Biden department of goalseeking stuff higher before revising it lower, has revised the following data sharply lower:
- Jobs
- JOLTS
- New Home sales
- Housing Starts and Permits
- Industrial Production
- PCE and core PCE
To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).
And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...
... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...
... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.
While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.
But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).
This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.
There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).
Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!
But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!
The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!
Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...
... but there has been zero job-creation for native born workers since June 2018!
This is a huge issue - especially at a time of an illegal alien flood at the southwest border...
... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.
Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.
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