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Sound Advice: May 15, 2024

 Sell in May. Buy back in October? 

A lookback at the quarterly returns of the Standard & Poor’s 500 Index clearly confirms that stocks generally deliver the bulk of their annual gains during the first and fourth calendar quarters.  There are numerous explanations for this bias, but whatever the reason it can be taken as a given.

Market strength in the fourth quarter would certainly be influenced by holiday season buying. This is when retailers generally have the highest level of profits. Indeed, some retailers operate in the red straight through until the fourth quarter. 

And, of course, that’s the time when folks tend to be more willing to spend.  If the retailers are doing well, it makes sense to expect that their suppliers are also doing well.

Aside from the seasonal factors involved, there are other issues that are equally or even more important.  Consider the prevailing trend in interest rates, which if rising tends to put pressure on stocks.  If easing, as they may well over the next year or so, stocks will have a more comfortable path upward.

But there’s also the continuing conflict between good news and bad news.  One example would be a big gain in the Gross Domestic Product, i.e., a jump in the state of the economy.  The good news would be that business is picking up.  The bad news is that a strengthening economy tends to increase inflation.  Take your pick.

Putting all of this together can become quite confusing.  Add in the nonstop noise from the media and you can easily be overwhelmed.

One day, the market jumps and commentators confidently let you know that the reason for the gain is “rate hopes”, a.k.a. the likelihood of lower interest rates ahead.  Not infrequently, the market has a big drop on the next day and the media lets you know that the change was due to “rate fears”, a.k.a. higher rates ahead.

All of this silliness comes under the heading “Give me a break.” The reality is that share prices over time are driven primarily by underlying changes in corporate profitability.  Plain and simple.  But the key phrase is “over time.”  What happens from day to day depends almost exclusively on changes in investor psychology.

Our best advice: Watch the climate, not the weather.

 N. Russell Wayne

Weston, CT

Any questions: please contact me at nrwayne@soundasset.com

203-895-8877

www.soundasset.blogspot.com

 

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