Tuesday, May 13, 2008

Stay in May and Sell Later!

The long-used investment adage is “Sell in May and go away.” History tells us that it works well to reduce equity positions in the spring and reload in the fall, when trading activity picks up after summer vacations. Will it work as well this year?

The U.S. economy has faced tough times before, but this year we find the unique convergence of tightened credit markets, low interest rates, inflation and slower growth. The high cost of gas and food means many investors are not going away on vacation this year. There will be fewer family driving vacations celebrated with lobster and steak dinners. Instead investors will be staying at home for hot dogs and beans in the backyard. This might mean that the usual seasonal trading patterns will not hold.

Then there is the relative level of the U.S. equity market to worry about. The Dow Jones Industrial Index has regained some of the ground it has lost over the last year. The Dow began May 2008 at 13,010, down 1.0% from a year ago. However, other indices dominated by technology stocks and smaller companies have not faired as well. At the beginning of May 2008 Nasdaq Composite is was down 5.2% for the year. Small capitalization stocks have not faired any better. By the beginning of May the S&P Small Cap 600 has regarding must of its losses for the year, but is still down 9.5% from a year-ago.

Even if an investor does not have to grapple with the question of whether to take losses now in order to prevent even greater losses during the summer months, there remains the issue of where to put the money. Cash or credit? Low interest rates and rising inflation on money market accounts make keeping assets in cash a risky, low-paying proposition. The bond markets have been volatile and some bond funds have been troubled by lack of liquidity in assets backed by student loans and home mortgages.

It is a tough choice. This year I think it makes sense to stay in the equity market. There are some bargains to be found. The aerospace defense and other exporters should be a good targets, as noted in the previous post “Honey, I shrunk the dollar” on May 9th. Dividend-paying stocks with a high yield should also be a good plays. Our next post will cover what to look for in choosing a good dividend stock. Some pretty flowers can be poisonous and the same is true for the stock with the high dividend yield.

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