- The Washington Times - Friday, July 3, 2009

It’s report card time or soon will be. While some may be thinking of elementary, high school and college students, I am referring to money mangers, mutual fund managers and hedge fund managers because the metric or metrics for their quarterly performance ending June 30 are now in.

As measured by the S&P 500, the market rose 15.2 percent in the June quarter to reach 919.32. Although this is higher still when compared to the early March lows, even after the second quarter of 2009 moves, the market is essentially flat year-to-date and remains down 28 percent on a year-over-year basis.

There is a saying that many in the market use and it goes like this: “Sell in May and go away.” The notion here is that investors should take profits and lighten up their investment positions in May and revisit the market later, often meaning the last two months of the year. Surprisingly, when historical data is analyzed, we find that it supports this notion more or less.

When analyzing historical returns though the figures vary from market to market, long-term data suggests the best time for an equity investor is from November through April, and the period from May until October is generally a less attractive time to be an investor. Let’s look at two indexes to make this a tad clearer.

First, let’s look at the domestic stock market. An updated study by Plexus Asset Management of the S&P 500 Index shows that the returns of the November to April periods from January 1950 to March 2009 were 7.9 percent per annum versus 2.5 percent per annum for the May-to-October periods. A similar analysis looking at the global stock market using the MSCI World Index shows that since 1969 the aforementioned November to April period generates an average return of 6.5 percent compared to -1.0 percent for the May to October periods.

In terms of 2009, there is a more than a fair amount of wondering whether the same will hold true this year. Prior to the March-May rise in all the major indexes, the common thought was “no, not likely.” However, with that strong rebound in the market and a slew of data points that are calling many to question whether we have hit bottom or if we are starting to feel any positive impact from stimulus initiatives to date, it’s not that surprising to learn that June has bucked the historical seasonal trend. The S&P 500 returned -2.1 percent in June compared with the historical average monthly return of 0.5 percent that had been generated over the 1950-2008 period.

The combination of continued weak economic data in recent weeks, the direct and indirect impact of higher interest rates and fuel prices are poised to take their respective toll.

Recent mortgage applications surveys have fallen far short of expected levels largely because of the recent bump in mortgage rates. Citigroup has increased interest rates on U.S. credit cards in advance of curbs on such rises, which is another layer to consider when contemplating how consumer spending habits will fare in the near term.

Another factor impacting consumer spending and corporate profits is the steady rise in fuel prices over the past several months, which will impact second half profits and spending. With the White House warning that the jobless rate could reach 10 percent in coming months, up from 9.4 percent in May, it’s not shocking to hear rumblings and chatter of a second stimulus plan depending on where the economic recovery is in the fall.

Already, however, we have seen more than a few companies deliver outlooks that were below expectations.

FedEx recently cut its outlook blaming an “extremely difficult business climate” and did not issue a full-year forecast given concerns about the economic recovery and potential impact of fuel prices. Best Buy recently delivered lower first-quarter earnings, weaker-than-expected sales reflecting a cautious consumer and signaled that earnings for the rest of the year would be worse than previously thought. BlackBerry-maker Research in Motion recently cut its revenue outlook for the year, from a range of $375 million to $425 million to a range of $350 million to $375 million.

Keep in mind the real fun, that is earnings season, kicks off after the upcoming Fourth of July holiday weekend and related festivities. In July we hear from Alcoa but the earnings floodgate really doesn’t brake open until the week of July 13, when companies such as Johnson & Johnson, Intel, Yum! Brands, W.W. Grainger, IBM, Nokia, PPG Industries and Harley-Davidson announce their quarterly results and share their updated outlook for the second half of the year, or in some cases don’t.

As we get these data points, we’ll be able to confirm whether or not “go away in May” was the right strategy or not. Based on what I have seen thus far, that roller coaster that is the stock market could get bumpy near-term.

• Chris Versace is the director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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