Despite the weather pretending it is March, this week Friday is actually the end of April for the financial markets. We will have completed one-third of 2023 at that point and will be heading into May.
May’s reputation precedes itself because The Stock Trader’s Almanac popularized the phrase “Sell in May.” The almanac found that, on average, traders would be best served by investing in stocks from November to April and bonds from May through October.
Of course, past performance does not, cannot, and will not predict future results. And averages are literally made to be broken by one-time events. Thus, our strategic approach to investing in stocks remains unchanged throughout the seasons – don’t invest in the stock market unless you can leave that money alone for eight or more years.
It is quite possible that 2023’s edition of May through October will test long-term investors’ psychological mettle.
Since the October 12, 2022, low, the stock market has bounced up around 10%, estimates for future corporate earnings have declined, the federal debt ceiling has been reached, several poorly run banks have gone under, and the Federal Reserve has raised their target overnight interest rates by a full 1% (with another .25% increase likely coming next week). One of these does not fit with the others.
It appears we are not alone in noticing this anomaly as short-term traders have piled into trades that would profit if the stock market declines (called short-selling). The challenge with short-selling is that to lock in short-term trading profits on a short sale, a trader must buy stocks at some point in the future – creating future buying demand that can lift stock prices.
The worst-case scenario for a short-seller is that stock prices continue to rise. They can lose some serious money if that happens, and these short-term traders could be motivated to buy stocks to avoid further losses if the market keeps going up.
These unique dynamics give us a glimmer of hope. The sheer number of traders betting against the stock market right now can be an indicator of positive returns in the near-term as those short-term traders are guaranteed to be future stock buyers at some point in time.
This confluence of gloomy economic and political headlines coupled with short-term short-sellers that need to buy stocks could certainly lead to a pretty volatile summer. Long-term investors could be sincerely tempted to sell stocks in May and go to the “safety” of cash – especially now that cash actually earns interest.
Converting from a long-term investor to a short-term stock trader that jumps to cash based on your ability to predict the future is foolishness.
Cash is for cash flow, liquidity, and emergency funds which are an incredibly important part of your plan, but it loses to inflation every single year. Stocks compound on surprises – both upside and downside. They often do what we least expect in an unpredictable pattern that builds wealth over long periods of time. Use the correct investment for the correct purpose in your financial life.
Despite the potential volatility brewing this May, may we suggest that, come what may, you may be best served by sticking to your long-term investment and financial plan than succumbing to visions of potential mayhem and selling in May.
Quote of the week:
Jeffrey Saut: “Good investors are instinctively contrarians! You have to learn to go opposite the mayhem of the markets.”