This article was published by The McAlvany Intelligence Advisor on Friday, May 4, 2018:
This is a hoary strategy derided by critics for years: Buy equities the first trading day after Halloween and sell the last trading day of April. But in 2012, three academics – Sandro Andrade, Vidhi Chhaoccharia, and Michael Fuerst – looked at the available data and concluded that it works: “On average, stock returns [using the “sell in May” strategy] are about 10 percentage points higher in November-May half-year periods than in May-October half-year periods.”
Some say this is a good strategy this year simply because of all the uncertainty. And they’re correct. Consider that the Fed remains steadfast in its determination to head off incipient inflation (at least according to its favorite tool for measuring prices increases – the PCE – which is up slightly year-to-date). The 10-year Treasury note breached three percent recently, offering for the first time a safe alternative place to put funds that were previously invested in dividend-paying stocks.
There’s North Korea (although Trump’s strong rhetorical threats seem to have dampened that country’s dictator’s enthusiasm for continuing to poke Trump in the eye). There’s the Iran deal, which appears to be unraveling as the president is just days away from announcing his decision to pull out of it. Stocks that peaked in late January have been unable to find a footing despite record earnings being reported in the last week. There’s Robert Mueller’s continuing search for something awful to hang around the president’s neck. There are the midterm elections in November. And so on.
But the positives are persuasive, as well. This writer has continued to report on the economic miracle that is playing out following the inauguration of President Donald Trump: Unemployment continues to fall, job creation continues to beat forecasters’ predictions, sentiment among consumers continues to climb, major companies’ earnings continue to set records, and the Conference Board’s Leading Economic Indicators rose a healthy 0.3 percent in March. In other words, there’s nothing on the horizon but blue skies.
But what about the chance of the yield curve becoming inverted? This is when short-term interest paid on the U.S. Treasury’s two-year note rises above that paid on its ten-year note. This has been one of the best indicators of a recession within the next 12 months as it reflects bond buyers’ expectations of a declining economy.
John Waggoner is an advisor to financial advisors, and explains that “an inverted yield curve [two-year interest is higher than the ten-year interest] is one of the better recession indicators around. A recession typically follows an inverted yield curve within 12 months.” But then he adds this caveat: “The short end needs to be about 0.6 percentage points higher than the long end to make a definitive signal.”
Right now that’s a very long way off: long interest is more than 0.4 percentage points above the short interest. Translation: there would have to be huge rise in short-term interest rates to trigger a recession.
There’s another indicator developed for market timers by iMarketSignals: its Business Cycle Index, or BCI. It looks at a number of economic indicators (interest rates paid on the 10-year Treasury note, the performance of the Standard and Poor’s 500 Index, unemployment claims, job growth, new houses for sale and recently sold, among others) and translates all of that into a single number. Says iMarket: “Our weekly Business Cycle Index would have provided early reliable warnings for the past seven recessions.”
Today? “The BCI is … above last week’s upward revised level and no recession is signaled.”
Trump confounded his skeptics in November 2016. He’s likely to confound them once again as the economy, and Wall Street, appear headed for more records. It would be too bad to miss the opportunity by selling in May.
SeekingAlpha.com: No Recession Signaled By iM’s Business Cycle Index: Update – May 3, 2018