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💸 Sell in May and go away?

Tuesday, 26 April 2022

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April 26, 2022 View online | Sign up
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TOGETHER WITH Finny

Good day to you. Can you guess who said to "be fearful when others are greedy, and greedy when others are fearful?" a. Elon Musk, b. Angela Merkel, c. Warren Buffett. Follow the wave 🌊 below for the answer.

Here are the topics for today 👇

  • Sell in May and stay far far away?
  • Wait out the housing market or not?
  • What is the Fear & Greed Index and what it’s telling us right now

INVESTING

Sell In May and Stay Far Far Away?

The notion of "selling in May and going away" can be traced back to England in the 1930s, when the English financial aristocrats of the era would often abandon their London affairs and take to the countryside for summer, eventually returning around St. Leger’s Day, a horse race held in September. 

So although its origins likely have little to do with the market’s summer performance, the idea has caught on, and we “may” have created a self-fulfilling prophecy of sorts, leading to historically lackluster returns during this time. How applicable is the theory though?

The case for selling

The case for “selling” in May, or at least adopting a much less active approach to your portfolio during this time, has some decent historical data on its side, so let’s see what we can find in favor of this concept.

  • Monthly comparisons: Based on data spanning 1980-2019, May is actually the 4th best month for the S&P 500 historically, but the key word is sell in May, not before. See, the following four months have an average net return of just -0.4%, with the hardest hits coming in August and September, the two worst months.
  • April reads the tea leaves: According to Barron’s, when the market is down through April, it’s fallen from the onset of May through September on 6 out of 15 occasions (40%)  this has happened since 1980, with the average net loss in those 15 years being 1.5% between May and Sept.
  • Current conditions: History doesn’t repeat itself, but it does often rhyme, so it’s good to know these numbers for reference. However, we should also consider catalysts that are relevant in the present. With a rough start to the year already, markets will also face rate hikes and Fed talks for the rest of the year, along with inflation fears and ongoing geopolitical threats, none of which are positive catalysts for now.

Broader considerations—doing it reasonably

When we shed that light on it, it’s easy to make a pretty convincing case for deleting your brokerage app for the next 4-6 months. But don’t go doing all that just yet, because there have also been plenty of years where you would’ve missed out on excellent returns had you sold in May. 

2013, 2014, and 2017 all boasted returns of 7% or more, and only 3 years between 2010 and 2021 saw negative returns. The S&P 500 yielded an almost 16% return between May and October in 2020, and 4% just last year. That’s a lot of gains to miss. 

Our take? If you’re just dollar-cost averaging (DCA) your investments for retirement, continuing to invest as usual seems to be a prudent strategy. If you’re a more active investor who likes to trade, it can also be useful to be more hands-on in the summer months. Keep eyes and ears on the markets and news that matter to you, and play accordingly.

📈 For those new to valuing stocks, take this lesson on the topic:

REAL ESTATE

Wait Out The Housing Market or Not?

Time in the market beats timing the market, right? Or wait, no, that’s the stock market. Does that apply to the housing market too? As we watch the cost of buying a home go through the roof, and the affordability out the window, it’s hard not to ask, should we just try to wait it out?

Conditions have been ripe for home prices to spiral these last few years, and spiral they did, rising 20% since 2020 alone. Now though, the winds are shifting a bit, and prospective homebuyers can sense a potential shift in the market.

The perfect storm—how it got this way

  • Interest rates: Home prices had been relatively flat, even falling a little, since their near-term peak in 2017, and they shot straight up as soon as the rates fell in 2020. If we compare the two charts, the inverse relationship we know all too well shows clearly, and this undoubtedly contributed to the spiral.

30-yr Fixed Mortgage Rate (top) vs. Median US Home Sales Price (bottom)

  • Savings: Spikes in personal savings rates directly coincided with the stimulus checks sent out to most of the population, but there were likely other factors involved with people moving out to the country and the economy slowing down. Saving a few thousand dollars the government sends out isn’t enough to turn millions into house hunters, but it’s a supporting factor nonetheless.
  • Supply/demand: Despite hosting about 16 million “vacant” homes, it’s fairly well known that the US also has a housing shortage issue in the millions as well, especially in the single-family area. Vacant homes that aren’t available for whatever reason don’t solve the problem, new construction does. Despite the fact that housing starts have been rising, existing home sales are also at or near all-time highs, and inventories take a while to catch up.

The deterioration, maybe.

Just like when a hurricane weakens when crossing over land, the housing market has its own kryptonites too. Between white-hot prices, tapped-out buyers, and interest rates bouncing back with a vengeance, we might just get some relief eventually.

So, should you risk waiting it out? That depends a lot on your situation. 

If you’re a pre-approved buyer in a healthy financial situation and are looking for a home to keep for decades, waiting will likely make little difference for you, because this is your home, not a commodity to flip. Prices may flatten, trickle up, or even fall these next few years, but that doesn’t matter much for you. The mark-up you might score by waiting might not even offset the rent you would pay in the meantime.

As an investor though, it might make sense to wait, but again, it depends. If you’re vying to lock in your first property in a high-demand area before rates move higher, maybe don’t wait. But if you need to finance your down payment with debt, the added interest may not make the investment attractive for you now and waiting might produce a better deal. Rental prices may exceed mortgage payments and related costs— getting to cash flow positive is always nice.

🏠 Related lesson alert. If you're new to homebuying, here's another relevant lesson that covers a few insights on mistakes to avoid when buying a home:

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MONEY TIP

What Is The Fear & Greed Index And What It’s Telling Us Right Now

Investors always hope that the market is not fairly priced, which kind of suggests it always is, when markets are efficient at least. In any event, we want it to be wrong, so we can get ahead of those market gaps and turn a profit out of them. 

Because of this, there are a lot of different ways to try and measure whether the market is fairly priced, none of which are gospel, but all of which are intriguing and instructive. One of the most popular is CNNMoney’s fear and greed index, which uses a less orthodox measure to gauge on a scale of 0-100 whether the market is being greedy or fearful.

Neither is good, but...

Greed represents a market that’s become overzealous, or even gluttonous, if you will. Think of late 2020 to early 2021 and the meme stock era. Fear on the other hand, represents the opposite, meaning markets are being unreasonably conservative.

Right now, the F&G Index sits at a cool 50, which is basically neutral.

What this tells us

The metric was 16 (extreme fear) as recent as March 16th at the bottom of the Q1 correction, as fears of war, inflation, and higher rates coalesced. It’s since rebounded, and has been fairly neutral since late March. 

This neutrality tells us a few things. One, we’ve endured a correction and are no longer at risk of greed. Two, markets are still apprehensive about pushing upward due to fears that linger surrounding those same macroeconomic and geopolitical issues, including hints at an impending recession.

💡 Here's a related lesson on this topic:

🔥 TODAY'S MOVERS & SHAKERS

  • Twitter (-3.3%) following yesterday's news that Elon will buy Twitter in a $44 billion deal. Shareholders will receive $54.20 in cash for each share of Twitter stock they own
  • Sherwin-Williams (+9.3%), a US paint company, posted better-than-expected earnings while maintaining its financial forecasts and future guidance; the company said supply-chain problems appear to have peaked
  • GE (-11.8%) as earnings beat Wall Street's expectations but missed on free cash flow growth; their future outlook was downbeat as they "continue to work through inflation and other evolving pressures"
  • Tesla (-10.4%) given Elon's Twitter takeover; questions arise as to whether he will need to sell down his Tesla stake in order to finance the Twitter deal
  • Bitcoin (BTC) -3% to $39,229
  • Ethereum (ETH) +0.6% to $2,903.32

This commentary is as of 9:20 am PDT.

🌊 BY THE WAY

  • Answer: Warren Buffett. 🧙 He stated it over 36 years ago, and it's a pretty simple strategic guide for investing. "Don't follow the herd. Train yourself to seek opportunities when other people see only crises." (Inc.)
  • 🍕You Knead To Know About This Investment. 800º GO’s raise is ending on May 4th. Get in on a slice of the action and invest in compact & scalable robotic pizza technology opening up in 100 new locations this year. Invest before time runs out!
  • ⏰ ICYMI: Time in the market, not timing, is what matters (Finny Bites)
  • 🏦 Fidelity’s new 401(k) offering will invest in Bitcoin (NY Times)
  • Finny lesson of the day: Can anyone invest in startups? Is that what crowdfunding is? Take this lesson on just that.


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The Gist is Finny's twice a week (Tues & Thurs) newsletter covering personal finance & investing insights and money trends. Finny does not offer investment and stock advice or endorsements. The Gist content team: Austin Payne, Othmane Zizi, Chihee Kim.

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