David Kotok of Cumberland Advisors has some interesting thoughts regarding the whole “Sell in May and go away” debate.
Based on his research, the whole idea of a post-May dropoff is based on moves of the Federal Reserve. When they’re in tightening mode, this is a bad time for stocks. When they’re not, it’s a good time for stocks.
The Fed is unlikely to raise the targeted Fed Funds rate between May and October this year. They cannot lower it, since it currently is between zero and a quarter of one per cent. Therefore, the application of the results of our historical study is hampered by the existence of the zero-interest-rate lower boundary. For this reason, we have to assume the Fed is either neutral or easing, and cannot be sure which applies. We have no history to guide us.
The same logic applies to other markets of the world. When we survey central banks, we find that Japan is unlikely to raise its targeted policy interest rate. It is currently near zero. The UK is also unlikely to raise its policy interest rate. In Europe, we are witnessing a massive easing of credit as the European Central Bank and the European Union create their version of a crisis response. Their policy may be likened to our American TARP and Federal Reserve activities following the failure of Lehman Brothers.
The Federal Reserve’s expansion of international swap lines appears to us to be a form of easing. Granted, it comes in response to the European crisis and the ECB initiative. However, easing is easing, no matter what form it takes.
As a result, we enter the May-October period with the working assumption that the G4 central banks are collectively easing. This should neutralize the negative seasonals in 2010. That is bullish for stock prices.
Our portfolios are again nearly fully invested. We have redeployed the cash raised from mid-April forward. We are glad we raised it. The sell-off in stocks gave us a chance to spend it, and we did.
We expect stock markets to trend higher. Our target for the US market remains 1250 to 1300 on the S&P 500 Index. We believe the US stock market will fully close.
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