In his new note, GMO’s Jeremy Grantham starts out pretty blunt:Lighten up on risk-taking now and don’t wait for October 1 as previously recommended. But, as always, if you listen to my advice, be prepared to be early!
Grantham notes an assortment of challenges: Geopolitical stress, long-term impact of the Japanese earthquake, the oil shock, and general commodity increases dragging down economic growth. etc.
He even introduces his own version of the “Sell In May” idea:
As readers know, driven by my increasing dislike for being early by such substantial margins, I have been experimenting recently with going with the flow. In defence of this improper behaviour, rest assured that it was motivated not by chasing momentum, but by my growing recognition of the immense power – sometimes the thoroughly dangerous power – of the Fed. Nowhere is this power more clearly revealed than in the ease with which it can move asset prices, particularly stock prices, and nowhere is this revealed more clearly than in Year 3 of the Presidential Cycle. I will not inflict on you once again the amazingly lopsided results of the Cycle, but will take this opportunity to introduce my new pet variant of Year 3 power: “Sell in May and go away.” This nugget came up recently, so we tested it. Bingo! In the first seven months of the third year since 1960, Year 3 has returned 2.5% per month for a total of 20% real (after inflation adjustment). In contrast, the second five months after May have delivered an average return of 0.5% per month, as does the fourth year of the cycle. Now, 20% is perilously close to the total for the whole 48-month cycle of 21%. This means, of course, that the remaining 41 months collectively return a princely 1%. This offers a brilliant, lazy investor’s rule: “Sell in May of Year 3 and go away for 41 months.” Whoopee! The unfortunate caveat is that there are only 11 entries for this analysis so it may well be pure luck. Still, it’s intriguing, especially if you like sitting on the beach for 41 months.
(Via Edward Harrison)