SocGen: ‘Sell In May’ Is Less Likely To Work This Year

On Tuesday, we took a brief look at the “sell in May” cliché courtesy of a few short excerpts from a Monday evening Goldman note that found the bank reminding market participants that risky assets do in fact tend to perform well from January through April, before stumbling in Q2 and Q3.

“The distribution of equity returns tend to be much more positively skewed during the first part of the year”, the bank wrote, before cautioning that “seasonality alone is unlikely to be a reason for lower returns.”

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The Appearance Of Routine Dip-Buying And A Fresh Look At The ‘Sell In May’ Cliché

Give the time of year, “sell in May” analysis is somewhat obligatory, so we weren’t surprised to see SocGen tackle it in a note dated Tuesday.

“Sell in May and go away until St Leger’s Day suggests investors should take their money out of the stock market and stay clear until St Leger’s Day, a famous UK horse meet in mid-September”, the bank writes, providing some historical context for anybody not familiar with the actual original of the adage.

SocGen looked at historical returns since 1970 and the “strategy” is indeed some semblance of viable for both US and global equities.

(SocGen)

As it turns out, this phenomenon is observable across economic cycles and also over time, although there is some variation.

“We observe that this performance discrepancy is more marked at the mid and late stage of the economic cycle”, the bank notes, adding that “focusing on whether the unprecedented waves of quantitative easing from the Federal Reserve had an impact, the performance gap between ‘warmer’ and ‘colder’ months can also be seen in the average returns.”

(SocGen)

So, what accounts for this readily observable seasonality? For SocGen, it’s all about earnings, and specifically, earnings downgrades.

“When we look at the average path of earnings expectations… through the year… we observe the same pattern of downgrades each year as expectations are always too optimistic early in the year [and] the downgrades are clustered mainly in June to October of each year, with a bottoming out at the end of the year”, the bank says.

This year should be different, though. If you ask SocGen, it’s still too early for an earnings recession cycle and the lowered bar for corporate profit growth is indicative of the market having priced in quite a bit of bad news. For what it’s worth, 68% of reporting companies had beaten estimates through last week.

(BofAML)

SocGen thinks the S&P could well hit 3,000 in the near-term (in a strategy piece out late last week, the bank cited buybacks and an assumed rebound in positioning and exposure as factors that could help push stocks higher), but they’re hardly sanguine.

The bank has been notoriously skeptical of equities for quite a while, and the suggestion that the S&P could hit 3,000 in the near-term hardly qualifies as some kind of bullish outlier considering we’re not that far away from those levels right now.