Jubak's Journal
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Don't let your portfolio go on vacation
It makes sense most years to forget about stocks as the temperature rises because Wall Street takes the summer off. This year, that may not be the case.
By Jim Jubak
Ten thousand dollars invested in the Dow Jones Industrial Average ($INDU) in 1950 would've appreciated to $420,243 today.
But more than 95% of that gain results from just one half of each year. An investor who bought the Dow stocks on Nov. 1 each year and sold on the following April 30 would have reaped almost all of that gain, even though he was out of the market for six months of each year. Just about the same thing is true of the S&P 500 ($INX) index.
Why? Tax-loss selling by institutions in October sets up an end-of-the-year rally that often begins in November. In addition, technology and retailing, among other industries, are profoundly seasonal, with better than 50% of many companies business jammed into the end of the year.
Then Wall Street goes on vacation for the summer and parks money in cash while its at the beach. The schedule for investment conferences that can boost stocks also goes dark for the summer.
The self-perpetuating trend
And dont forget that when investors find success following a trend, they're more likely to bet with it again. Thus, trends can become self-perpetuating.
But "go away in May" isnt foolproof. In both 1972 and 1973, November through April produced losses of 4% and 12%, respectively, while May through October gained 0.1% and 4%. Then again, the traditionally weaker six-month period turned out to be the stronger half of the year as recently as 1993 and 2000. This year could be another of those exceptions
That's not just because the six months from November 2002 through April 2003 were so weak, either. Although with the Dow Jones industrials were flat for the six months and the S&P 500 up just 2%, the traditionally better half of the year left an easy comparison.
No, there are five reasons for thinking that the wise move this year might be to hang on in May.
No. 1: The continued unwinding of negative psychology from the Iraq war. Remember that the battle for Baghdad ended less than a month ago. The worries about U.S. casualties in the capitals streets, about the possible destruction of Iraqs oil fields, about chemical and biological attacks on U.S. troops, and about potential terrorist attacks at home sent many investors into psychological bunkers from which theyre still emerging.
No. 2: Low expectations for second-quarter earnings growth. Wall Street is predicting just 6% earnings growth for the second quarter, according to Thomson First Call. Following the first quarter's 13% or better growth, thats a low bar for stocks to jump. Low bars mean fewer warnings and more positive surprises.
No. 3: Energy prices are falling. After peaking in the neighborhood of $40 a barrel, oil prices have fallen to $26. Recent OPEC production cuts look unlikely to have any effect before fall. Thats good news for consumers who have more money to spend when energy costs are lower and companies that see earnings climb when fuel costs drop.
No. 4: Hope for the year's second half. Investors are likely to look past projections for lousy second-quarter earnings growth to the pot of gold in the last two quarters. According to analysts' estimates, earnings will climb 12% in the third quarter and 22% in the fourth quarter.
Projected earnings growth for financial and technology stocks, two sectors that investors like to see lead the market, are even higher, at 39% and 28%, respectively, for the fourth quarter, according to Thomson First Call.
The March jump of 2.2% in factory orders and 3% in non-durable goods orders offered just enough evidence to keep hopes alive for a better second half.
No. 5: No facts to dash that hope are likely to be available before July. Investors wont have any really good read on the September quarter until July, when companies announce guidance for that quarter. Absent really bad general economic data, stocks are free to move on hope until then.
This doesnt make the period from now through July a sure thing. A weak dollar is already putting pressure on U.S. financial markets, and a falling dollar could end the rally.
But this year, the first days of warm weather arent a sign that its time to stop thinking about investing until the fall.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. Selected CNBC stories can be found in the TV Reports index.
At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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