The Wall Street adage “Sell in May and go away” looks to be spot on this year. At the close yesterday on May 18, the Invesco QQQ Trust ETF (QQQ), which tracks the NASDAQ 100, was still p 2.83% for 2021, but down 2.96% for the last three months and off 5.79% for the last month.
But the full saying in its original form runs “Sell in May and go away; Don’t come back until St. Leger’s Day.” St. Leger’s Day marked the running of the third race in the British Triple Crown, which took place in September. The advice was to sell ahead of the quiet summer London social season. The adage as I learned it (not in England between the wars, mind you, since I’m not either that old or that patrician) advised to “Buy on NEA,” the big technology and venture capital conference usually held in November.
That seasonal timing strategy let investors reap the gains from, historically, the six best months of the yer (November through April) and avoid the sluggish performance of May through October. From 1950 through 2019 the November through April period of each year saw the Standard & Poor’s 500 gain 2283.7 points, according to calculations by Jeffrey Hirsch in the Stock Trader’s Almanach. That’s against gains of just 610.79 points in the worst six months during that period.
But this year? When should an investor or trader who has sold in May think about coming back?
The calendar of macro economic events, and especially the calendar at the world’s central banks, suggests that a September or November return to the markets might be premature in 2021.
That calendar, as I read it, appears stacked against as rising market after September or November.
The problem is that the market is extremely fearful that inflation is moving higher and that central banks, including the Federal Reserve, will have to raise interest rates sooner rather than later to control that spike in prices. (The pessimists, of course, believe that the Fed has already fallen behind on inflation and we now face a move higher in the inflation rate that will require a much bigger interest rate increase.)
Here’s my take on that schedule of worries.
The end of May brings a meeting of the European Central Bank and an update on the bank’s projections for the inflation rate. Negative events would be an increase in the projected rate of inflation and any language that suggested the bank was worried about the trend in price increases.
The next meeting of the Federal Reserve is set for June 16. This is a big deal meeting since it includes an update on the bank’s economic projections including its expectations for inflation. The bank tends to limit its changes in monetary policy to meetings that include updates on economic projections. Nobody (well, almost nobody) expects the Fed to do anything at this meeting but the bank could signal a shift in its thinking that would include cutting back on the $120 billion a month in bond purchases and some verbiage that would put some flesh on the bones of the Fed’s assertion that increases in inflation are just temporary.
The Fed meets again on July 28 but this is a minor meeting without any update to economic projections. And the bank doesn’t meet in August.
Instead August brings the global central bankers retreat at Jackson Hole, Wyoming, sponsored by the Kansas City Fed. The Federal Reserve has in the past used this meeting to signal a shift in monetary policy. And those Fed watchers who are thinking that far ahead speculate that the bank might rock the inflation and interest rate boat at Jackson Hole.
Which brings us to the Fed’s September 22 meeting, which again includes an update of the bank’s economic projections. Since 2020 this meeting has been seen by Fed watchers on Wall Street as the most likely occasion for an announcement of a shift in Fed policy. That seems especially likely to me because the Fed doesn’t meet at all in October and holds only a minor meeting (without economic updates on November 2.) If the Fed passes on the occasion of the September 22 meeting, then the bank won’t be able to do anything until it meets again on December 15. That’s a really, really long time for the bank to do nothing. (The Fed can make policy changes between meetings but it tries hard not to do so since any between meetings move will strike the financial markets as signaling an “emergency.”)
And that brings up to the December 15 meeting.
The longer the Fed waits to announce (or do) anything, the tighter that will ratchet nerves on Wall Street. And generating a sustained rally is very difficult in the face of increasing worries of a change in Fed policy that would result in higher interest rates sooner than now expected (late 023?) or that signals that interest rates would peak above the 2.5% that’s now the consensus on Wall Street.