Originally published in the Daily Journal of Commerce, Portland OR
Published June 9, 2014
William RutherfordOne of the oldest market timing indicators on Wall Street is “sell in May and go away.” This mantra is supposed to identify seasonality in the market. History shows that the weakest part of the year for stocks is the period from May to November. But critics think this theory confuses correlation and causation. This year should be especially bad, according to the pundits, because it is an election year – when there is more market uncertainty.

However, this was not the year to sell in May. This May, like the last several, was an up month for the market. Indeed, it was an up month for bonds as well. The Dow finished the month up 0.8 percent and the S&P was up 2.1 percent, its biggest monthly advance for the year. Both the Dow and the S&P notched their fourth straight month of gains. During the month, both indices traded at all-time highs.

The Dow is up 0.9 percent on the year, after a difficult January, and the S&P is up 4.1 percent on the year to date. Utilities, health care and energy led the way. Utilities alone are up 11.09 percent year to date, as investors sought yield. Transports are up 9.5 percent year to date. Transports are thought to be a leading indicator of market action, so their strong showing is a positive indicator for the market.

The Nasdaq rose 3.1 percent in May after two months of losses. The Nasdaq is up 1.6 percent year to date.

Safe haven government bonds also rallied in May, making it a clean sweep for the markets. Ten-year Treasury yields ended the month at 2.459 percent. The bond rally was contrary to expectations and caught traders off guard. Their explanation was that the bond rally was “technical,” which means that the traders did not see it coming.

Not all global markets kept up with the U.S. markets, with some notable exceptions. Russia, for instance, was up 12.12 percent on the month after tensions in Ukraine moderated. Still, for the year Russia is down 10.19 percent.

The Euro fell 1.7 percent in May versus the dollar, but is still up slightly on the year. An all-important European Central Bank meeting was held June 6, after this column was submitted; the ECB is pondering what to do about the struggling European economy and its frightening flirtation with deflation. Interest rates in Europe as set by the ECB are now at historic lows of 25 basis points, but may have to be reduced further to head off deflation. The ECB may even charge banks to deposit money with it in an effort to force banks to make loans to business and households.

Mario Draghi takes the threat of deflation seriously, and in the past has vowed to “do all that is necessary” to get the European economy out of its funk. Traders, hedging their bets, sold euros in advance of the ECB decision. If the ECB does not take drastic action, expect a sharply negative market reaction.