Sell in May and go away? Three reasons to defy the old adage – UBS
|We are entering a time of year when stocks have historically found it more challenging to advance. With many equity indexes making new highs, investors may be tempted to follow the old adage: Sell in May and go away. But the sell-in-May strategy doesn’t work consistently across markets and economists at UBS see reasons why this year may be different.
Timing markets is notoriously tricky and can be costly
“While the strategy has worked for Europe, in the US a stay-invested strategy has tended to outperform, particularly in recent years. Market composition, with the US market more tilted toward growth stocks, partly explains the outperformance. The tech sector’s weight in the S&P 500 has increased to 27% compared with a weighting of just 8% for MSCI Europe. Trying to time the US market for seasonal reasons would have missed out on the outperformance of growth stocks in the bull market since the 2008-09 financial crisis.”
“In the current environment, it may be premature to expect a near-term peak in equities. The effect of fiscal stimulus and the post-COVID-19 bounceback in consumer and business demand is leading to extraordinary levels of growth, particularly in the US, that are likely to persist for a number of months yet. In turn, this supportive macro backdrop is feeding through into a stronger-than-expected recovery in corporate earnings – US 1Q profit growth will exceed 45%. In our view the rally in stocks has further to run.”
“For investors selling in May, buying back later can be psychologically difficult, particularly if markets have rallied in the meantime. This can delay the decision to reinvest even further, potentially compounding the effect. Moreover, in the current environment, holding cash for too long is expensive. With nominal interest rates lower than inflation, real rates are negative, so cash will be a significant drag on portfolios.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.