“Sell in May and run away, but remember, to buy again in November.”
Two campers are hiking through the woods. Suddenly, a huge brown bear appears in a clearing about 100 feet away and begins lumbering toward them.
The first camper quickly drops his backpack, frantically pulls out a pair of sneakers, and begins putting them on.
The second camper says, “What are you doing? Sneakers won’t help you outrun a bear.
The first guy says, “I don’t need to outrun the bear. I just need to outrun you.”
Wall Street asks, “Why doesn’t the second guy club the first guy unconscious? Then he could WALK away from the bear, and still have time to take the first guy’s backpack as well.”
But seriously folks, is a/the bear coming? Should we put on our sneakers?
It’s that time of year. If May is a hammer, is our portfolio a nail? Wall Street denizens are vague about the fundamental underpinnings of such a hoary old saw, but they ignore it at their peril. The maxim has historical chops.
The big picture site, http://www.ritholtz.com/blog/, has a chart, with a proviso, of course. The site points out that “Sell in May” has worked in 37 of the past 43 years, but doesn’t work in “election years.” The phrase, election years, is vague. Does a non-Presidential election year qualify? Or, cynically reframed, could Big Uncle Brother Sam attempt to influence the markets because of any kind of election? Hmm, do brown bears run after people in the woods?
Institutional investors will not be selling everything, and waiting for autumn. That’s a “zero tolerance” decision. If a manager does that, and is wrong, they’ll be fired. So, the mutual funds, pension guys, and most hedgies will remain invested. What else is new?
If seasonality is insignificant with respect to our money, is there another factor that investors should be looking at now? How about demographics? Rob Arnott is a summa cum laude graduate of the University of California, Santa Barbara. He’s chairman and CEO of the $150+ Billion money manager, Research Affiliates, in Newport Beach, California. He has written more than 100 academic articles and was editor of the prestigious Financial Analysts Journal from 2002 to 2006. Here’s his take on demographics in an edited interview with Barron’s.]
April 21, 2014, Barron’s: What about demographics? Rob: “Demography is the 800-pound gorilla for the macro economy and the capital markets. In the 20th century, we had a demographic tail wind in the developed countries, particularly in the century’s second half. The death rate tumbled, allowing people to work longer. The birthrate tumbled, allowing families to have fewer kids to support. There were better support ratios-that is, more workers per nonworker, including kids. There were very few senior citizens to support because, while people were living longer, there weren’t that many oldsters yet. So we had the most benign demography in the history of mankind. That unleashed entrepreneurialism, innovation, and invention, permitting rapid productivity growth. The crescendo of growth, which started in the industrial revolution, continued through the electronic age, with computers and the Internet.”
How is this affecting GDP? “GDP growth has been slowing quite drastically for several decades. Economists, political pundits, and the commentariat in the press all talk about 3% real GDP growth as a magic number that everyone seems to expect us to return to. But what is the real GDP growth of the past 40 years?
It’s 2.1%. Yet if you say, “I’m expecting 2% growth in the decades ahead,” you are viewed as a pessimist. If you say you expect 1% growth, you are viewed as a lunatic. But 2.1% is the 40-year growth number. You have to back the clock up about 20 more years to find trailing 40-year growth that was north of 3%. So it’s a long time since we had 3% as a long-term norm.”
What’s the upshot? “Because those benign demographics lasted through the latter half of the 20th century, it felt normal and is still perceived as normal. However, over the next 20 years, the working-age population will be growing a little over 0.5% a year. Over the past 40 years, it was a little under 1.5% a year, so that’s a yearly one-percentage-point haircut in potential labor-force growth. That means a one-point haircut in potential GDP growth. The average worker is older than the average worker was in the past 40 years. Older workers are more productive than younger workers, but their productivity growth rate is lower. So while they are more productive and per capita GDP will be greater, productivity growth will be slower. [More oldsters will work; productivity gains come from firing people.] 1% real annual GDP growth in the next 20 years would be totally unsurprising.”
What are the implications of that? What’s missing is a lack of realism by most economic observers, and there is an expectations gap, which is dangerous. If we demand that our political elite create 3% growth, when 1% to 1.5% is the new normal, they’ll create growth. The only way they know how to do that is by deficit spending and artificial stimulus. You can create temporary growth by spending money you don’t have, but you pay for it later in the form of slower growth. That’s awfully dangerous and very destructive to long-term growth. But slower growth and lower market returns will be pretty benign, if people expect them. If I’m expecting 1% or 1.5% real growth in the economy, if I’m expecting bonds to give me 2% or 3% returns, and stocks to give me 5% or 6% returns, I’ll spend less, I’ll save more, and I’ll work a little longer. If we’re living longer than our parents and grandparents, we should work a little longer. Common sense says that spending a little less, saving a little more, and working a little longer is a pretty benign outcome, compared with spending more, saving less, and retiring into squalor.”
What kind of birthrate is necessary? “An average of 2.1 children per woman. In the developed world, the rate now it is well below two. In the U.S., it is nearly two, so we are OK [with the help of immigrants]. In an extreme context, let’s suppose that, on average, every woman has one child. Eventually, the population drops by 50% every generation, and the support ratios are truly horrific. So that can’t work long term, but isn’t a problem today. Over the next three to five years, valuations begin to be dominant, and that points to emerging markets. And over the long term, demography plays a huge role, and that also points to emerging markets. For anyone with a time horizon longer than one or two years, emerging markets look to be in the sweet spot.”
Arnott’s view might explain Japan’s softness the past 25 years, and may indeed explain the slowpoke U.S. market performance the past decade. That still sounds like U.S. equities could get soggy over the summer, unless election year politicking bails us out.
If you like Rob Arnott’s hint, look at emerging markets. They’ve gotten cheap. The ETF for Europe, Austrasia, and the Far East stocks is EFA.
Oh, wait. Gold and silver usually take the summer off too. There are no big miner conferences, all the mining company execs are on vacation or out looking at their “operating mines,” and there are usually no drill results until the fall from the colder regions. It could be slow for stocks, but coins are still cheap. And the sentiment couldn’t be any worse for PMs generally. Money Magazine, the best contra indicator of all time, just put gold on the cover.
So, with stocks, I’m firmly in the could-go-either-way camp. But I am keeping my sneakers handy.
FF does not own EFA. Nor does he subscribe to Money Magazine.