There’s plenty of historical evidence that shows the period from May through October is weak for stock performance, but investors shouldn’t rush to sell stocks this May, says David Kotok, CEO of Cumberland Advisors.
“When the Fed is tightening during the May-October period, American stock-market investors are best served by selling in May and going away,” Kotok writes in a note to investors. “A hostile Fed can really damage portfolio values between May and October.”
Even when the Fed is neutral, the May-October period still underperforms the November-April period, Kotok observes, and when the Fed is easing between May-October, monetary policy fully neutralizes the negative seasonal effects.
Because the Fed is unlikely to raise the targeted Fed Funds rate between May and October this year, “we have to assume the Fed is either neutral or easing, and cannot be sure which applies,” Kotok says. “We have no history to guide us.”
Moreover, the Fed’s expansion of international swap lines signals that the G-4 central banks are collectively easing. “This should neutralize the negative seasonals in 2010,” Kotok says. “That is bullish for stock prices.”
“We expect stock markets to trend higher,” he notes. “Our target for the U.S. market remains 1,250 to 1,300 on the S&P 500 Index.”
U.S. stock futures point to a sharp fall in markets, Benzinga reports, despite an impressive rally as doubts regarding the effectiveness of the European Union rescue package and rising Chinese prices forced traders to switch to a more serious tone.
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