Stock Market: Why Selling In May Would Be A Rookie Mistake

(Drivebycuriosity) - Every year around this time a silly slogan appears in the media: Sell in May and go away. It has been wrong most of the time and will be wrong this year again.

Since May 2017 the US stock market (represented by the S&P 500) gained around 10%. And in the long run the stock market has been gaining 7% per year on average.

The slogan also is self-defeating. If many follow and sell in May, their sales would set the stock market under pressure and stocks would become significantly cheaper. When the "May-sellers" come back to the market - say by the autumn - their purchases would lift stock prices again. Following stubbornly the "sell in May" proposal would therefore implement to sell cheap and to buy expensive.

I am aware that there are some headwinds - as usual. President Trump announced massive tariffs against China imports, which could lead to a trade war, and interest rates are climbing. But I am convinced that the rally will continue. History shows that stock prices & interest rates can happily rise together: The Bank of America Merrill Lynch (finance) notices that “the 1950s was a period of higher stock prices and higher US interest rates. The US 10-year yield bottomed near 1.5% in late 1945 and the S&P 500 remained firmly within its secular bull market until yields moved to 5-6% in the mid 1960s. The S&P 500 rallied 460% over this period.”

I also doubt that Trump`s tariff hikes will escalate into a full fledged trade war - which could cause a new recession. I think that all participants (USA, Europe, China) are aware of the risks and I suppose that the counterparts will have enough brain to negotiate for an acceptable compromise.

 I suppose that stock market will still benefit from four trends at least:

1. Company profits will continue their solid growth, the engine of the stock market gains. During the recessions of the years 2001/02 and in 2008 companies restructured and reduced costs significantly in order to survive. Now they are much fitter and more efficient than before. I believe that this learning process will continue and will translate into a long term trend of rising company profits.

2. We are experiencing a new industrial revolution.  Advances in Internet, mobile computing, 3-d-printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets.

3. Lower taxes and less regulation in the US will also support the growth of the company earnings.

4. We are having solid tailwinds from the emerging markets which are even getting stronger. The catching-up process in China, India, Indonesia and a lot of other countries translates into high growth in large parts of the global economy that creates continuously rising revenues & profits for global companies like Starbucks, IBM, Caterpillar, Apple and other members of the S&P 500 (world).

Selling in May would be a rookie mistake again.