Instead of selling in May, advisers may need to get creative

The adage of selling in May and going away till November is being kicked around again this year, but with a twist.

In the midst of the COVID-19 pandemic that has brutally hamstrung the global financial markets, and on the heels of the stock market’s strongest month of April since 1987, market watchers are warning against knee-jerk reactions.

“We wouldn’t be shocked to see a well-deserved correction, but history shows the advantages of selling in May and going away might have gone away because everyone is factoring it in,” said Ryan Detrick, senior market strategist for LPL Financial.

The S&P 500 Index’s 30% rally from the March 23 low, including April’s 12.7% gain, might be cause for a pause, according to Detrick.

But the fact that a pandemic landed right in the middle of an otherwise healthy economy should be a consideration, he said.

While the six months between May and Halloween have historically been the weakest of all 12-month rolling periods for equities, it’s worth noting that the average return of the S&P over that period since 1950 has been 1.5%.

“It still makes a lot of sense that we’ll have that normal summertime pullback.” Detrick said. “But 1.5% is still making money and it’s still beating inflation.”

The past nine years have seen just three negative May to October periods, the most recent of which being a 0.3% decline in 2015.

While it might be tempting to take some chips off the table now that the market has rebounded and is down about 10% from the start of the year, Sam Stovall, chief investment strategist at CFRA, said a better strategy would be to rotate.

As analysts debate whether the market is poised to retest the March lows or has already moved past the bear market stage, Stovall said financial advisers should take this time to employ a seasonal sector rotation.

Stovall explains that “some sectors have their day in the summertime, while others skate along smoothly in winter.”

Since 1990, which is as far back as S&P Dow Jones Indices has sector-level data, the S&P 500 recorded an average May to October gain of 1.8%. But the consumer staples and healthcare sectors of the S&P recorded average gains of 4.4% and 4.8%, respectively.

By contrast, during the markets strongest six-month period from November to April, the cyclical sectors beat the defensive sectors.

Specifically, since 1990 the S&P 500 has averaged a 6.4% gain during the November to April period.

But the consumer discretionary, industrials, materials and technology sectors combined for an average return of 8.8% over that same period.

Stovall’s analysis of a hypothetical S&P 500 Index that rotated into the consumer staples and healthcare sectors from May through October, and then into the consumer discretionary, industrials, materials and technology sectors for the November to April period would have produced an average annualized return of 13.1% over the past 30 years.

That compares to a 7.4% annualized return for the S&P 500 Index over the same period.

The advantages are also clear when applied to the S&P SmallCap 600 Index and the S&P Global 1200 Index. The seasonal sector rotation of the small-cap index would have produced an annualized return of 11.8%, compared to an 8.2% for the standard index.

Seasonally rotating the global index would have produced an annualized return of 10.7%, compared to 5.2% for the standard index.

“You don’t want to just retreat or sell, you want to rotate,” Stovall said.