Sell in May

May 29, 2024 | François Sicart
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I recall that there used to be a common Wall Street Almanac refrain that urged investors to “sell in May and go away.” I never paid much attention to presumed patterns of seasonal stock market behavior, yet here we are in May, and times have changed. I began investing in the late 1960s under the guidance of traditional value investors. However, the nature of the market – and, naturally, its behavior – has since changed materially.

From Hard Figures to Guesswork

The basic premise of value investing, as practiced by its “pope” Ben Graham and his early disciple Warren Buffet, was simple and rather easily implemented. It was basically a balance-sheet approach; you calculated the value of cash and very liquid (i.e. readily saleable) assets. From this total you deducted the company’s total liabilities (debt, etc.) The result, at least in theory, was what the company would be worth in an instant liquidation. If this estimate of net/net current assets was greater than the total stock market valuation of the company, you were buying value and could afford to wait for market prices to adjust to this reality.

Since then, much has changed, most strikingly the broad availability and low cost of computers that permit anyone with a keyboard and rudimentary accounting skills to assess the theoretical value of their assets. In addition, large, easily filtered and sorted databases provide a level of market context. As a consequence, simple balance-sheet values were gradually replaced or augmented by measures of companies projected earning power, such as Price-to-Earnings ratio (PE). Soon it became customary to compare companies’ prices to suppositions of future earnings, cash flows, or even sales. As current, measurable values were replaced by guesses at a company’s future operating performance, the precise measurement of that company’s under- or over-valuation became increasingly speculative.

Competition Feeds Leverage

More recently, as computers also enabled the frequent measurement of investment performance, competitive pressure led to the development of new products and derivatives, providing access to more leverage, and promoting volatility. Greater financial leverage means better investment performance when markets go up – naturally. However, when markets decline, losses are also more dramatic.

The novelty or complexity of these new products – coupled with the financial leverage attached to them – could lead to system-threatening miscalculations such as what happened with Long Term Capital Management in 1998 for example. If large enough, some of these might even have such destabilizing consequences as to require bailouts by the Federal Reserve or other government agencies.

So far, I have seen no abatement in the race for complex products that sometimes offered the promise of outsized gains or protection against losses – or even both.  Recently a growing number of financial accidents or fraud (so far manageable, but larger incidents can’t be ruled out for the future) should serve as a warning about the resilience of our markets.

Artificial Intelligence and Human Ignorance

We believe other areas of speculation warrant caution. In recent months the rotation among favored groups of stocks — from the “magnificent seven” high-quality growth stocks to commodity-linked shares such as oil or metals – when the world economy accelerated and supply concerns peaked, to smaller manufacturing companies more recently, as the economic recovery seemed to spread.

Perhaps the most perilous groups from an investment perspective are artificial intelligence and “meme” stocks.  We believe enthusiasm for any company involved with artificial intelligence should recall memories of the early internet days (or even, for those who remember it, the debut of the radio). These inventions were eventually highly beneficial to the economy but few of the companies involved turned out to be successful investments. In fact, many of the initial favorites did not survive.

The Wrong Signals

Investors increasingly follow indicators that tend to be irrelevant to the outlook for the stock market.

First, we have found there is no compelling correlation between the economy’s growth and the future behavior of the stock market, especially over the short or medium terms. Even official concerns about the advent of a recession have been closer to the actual end of a slowdown in Gross National Product than to its beginning.

Second, the volume and frequency of transactions on the major markets has increased so much as to give stock prices increasing independence from the underlying valuation fundamentals.

Finally, investment performance is typically measured against weighted indexes where the stocks of a few large companies can disproportionally influence the indexes’ behavior. As a result, investors can feel compelled to buy those “bellwether” stocks, pushing their prices ever higher. This dynamic creates an unhealthy spiral that can be reversed with painful results when the favored index stocks fall out of favor. These distortions in performance measurement can increase the apparent market volatility and create large disparities (sometimes long-lasting) between the behavior of the indexes and those of the majority of stocks.

Value or Contrarian Investing

The behavior of the stock market is increasingly determined by volume and crowd behavior rather than by value comparisons. However, the difference between calculated value and market prices can become quite large at times, depending on the level of euphoria or disenchantment among investors.

As so often in investing, we believe patience is the key to success. With the evolution of accounting tools and benchmarks it has become difficult to precisely evaluate a company’s value. However, common sense and experience should help identify periods of gross over- or undervaluation.

The best tactic for investors is to eliminate the grossly overvalued companies that are currently popular, and to accumulate undervalued and neglected stocks with sturdy, fundamentals. Over the long terms, they should pay off, for this is where patience shines.

François Sicart – May 29, 2024


The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This article is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally