As May approaches, it’s time to reflect on the well-known adage: “sell in May and go away.” This catchy phrase signals the end of the traditional spring rally in stocks and suggests it may be wise to consider selling. There’s historical evidence supporting this advice, making it worth a closer look.
Historically, following this strategy has yielded favorable results. According to the Stock Trader’s Almanac, investing $10,000 in the Dow since 1950 from November to April would have grown to an impressive $684,073 by the end of 2011. Conversely, if you had kept that same investment from May to October, it would have dwindled to a loss of $1,024 by the same date.
This stark contrast raises an important question: Is it time to reassess your investment strategy? If you’re hesitant to sell, here are a few more factors to consider.
First, consumer sentiment has dipped, as indicated by the Thomson Reuters/University of Michigan index, which declined to a three-month low in April. Given that consumer spending constitutes 70 percent of the economy, a drop in spending can significantly impact GDP.
Additionally, many American companies are struggling to meet earnings forecasts. Currently, less than 50 percent of companies reporting earnings are exceeding revenue estimates for the third time in four quarters—a clear indication of a slowdown in business activity.
The Opportunities We Are Waiting For
In essence, the economic landscape appears to be shifting just as stocks reach near all-time highs. A correction of 10 percent or more seems increasingly likely, which we at Economic Prism view with interest.
Investing in strong businesses at attractive valuations is a principle we uphold. We understand that when stock prices fall, yields may rise—regardless of the dividend remaining unchanged. It’s a straightforward mathematical relationship.
Armed with this knowledge, we strategically navigate the stock market, maintaining patience. We recognize that quality companies often suffer during market corrections, and these downturns present the opportunities we eagerly await.
Moreover, we believe that the easy monetary policies set forth by Ben Bernanke will continue to inflate asset prices. Still, it’s important to remember that no market rises indefinitely without fluctuations. There are optimal times for buying and selling, and now may be a period better suited for selling.
However, following a potential summer slump, numerous appealing stocks with attractive dividend yields will emerge. These will prove to be wise investments, particularly as rising asset prices will benefit high-quality companies.
Tend to Your Garden
Ultimately, accumulating wealth demands time, patience, and persistence. The notion of getting rich quickly is fraught with risk and often leads to failure. Jumping from one stock to another in hopes of doubling your investment each month is a recipe for loss.
We advocate for methods of wealth-building that have stood the test of time. Historical strategies instill confidence that they will continue to be effective in the present and future.
Moreover, the urgency to grow wealth has never been greater. It may seem astounding, but if you plan to retire in 30 years, saving several million dollars will likely be necessary. The purchasing power of $1 million has significantly diminished since 1980, when $350,000 would cover similar expenses.
At current inflation rates, it could take $2.85 million by 2040 to match what $1 million buys today. With life expectancies increasing, these funds will need to last at least 25 years while also accounting for rising healthcare costs.
Given the evident disconnect between the stock market and economic fundamentals, it might be wise to amass cash while creating a focused shopping list of high-quality dividend stocks. The summer months could provide excellent opportunities for those prepared to act when exceptional values arise.
In the meantime, nurture your financial well-being, enjoy a refreshing glass of lemonade, and find joy in the present. Soon enough, the groundwork will be laid for the next generation of wealth, and you’ll want to ensure you capture your share.
Sincerely,
MN Gordon
for Economic Prism