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May traditionally marks the beginning of the six months when the stock market’s returns lag the November-April period, coining the adage “sell in May and go away.” But with all such axioms, there are always exceptions and the health care sector appears to be one.
Jeff Hirsch, editor of the Stock Trader’s Almanac, pored over the data for various assets during a 27-year span and found that some sectors thrive, even when the broader market is struggling.
The NYSE Arca Biotechnology Index BTK, -0.12% rallied an average 8.83% between May to October over 22 years and the S&P 500 health care subindex gained 4.64% during those months going back to 1990, compared with the S&P 500’s SPX, -0.60% 1.53% rise. The consumer staples sector was another overachiever, returning an average 4.45%.
“Although not the best sector by average percentage, consumer staples advancing 81.5% of the time is the closest thing to a sure bet for gains during the ‘Worst Months,’” he wrote on his blog.
At the bottom were materials, which fell 2.31%. Transportation and industrials also posted dismal returns.
Sam Stovall, chief investment strategist at CFRA, made a similar observation last month, recommending investors to rotate into “defensive” stocks rather than exit the market completely.
Defensive plays refer to investing in companies that manufacture or provide services that are viewed as essential regardless of the economic cycle, such as consumer staples—food, beverages, tobacco, medicine—and utilities.
Strategists at Bank of America Merrill Lynch likewise urged investors to refrain from selling out. Instead, they trimmed their exposure to stocks, even though they remained overweight in equities, and raised their allocation for cash, given the nearly 8% surge in the S&P 500 and expectations for additional interest rate hikes.
Meanwhile, Brad McMillan, chief investment officer at Commonwealth Financial Network, argued that the “sell in May” rule is a good example of how NOT to invest.
“The benefits are speculative and uncertain. What is certain are the costs, in transaction fees and potentially taxes. Over time, it simply doesn’t make sense. You’re better off spending your time and energy trying to understand what’s actually going on,” he said in a recent note.
To underscore how spurious and irrational such relationships are, Macmillan points out that statistics with the highest correlation with U.S. stock market returns are the cheese production rate in the U.S. and the combined sheep population of Bangladesh and the U.S.