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Selling in May and going away? Then consider buying bonds

Traders work on the floor of the New York Stock Exchange.


Globe editors have posted this research report with permission of S&P Capital IQ. This should not be construed as an endorsement of the report's recommendations. For more on The Globe's disclaimers please read here. The following is excerpted from the report:

At this time of year, it is natural for investors to question whether they should reduce their equity exposure as we move closer to the historically vulnerable May through October period that has coined the old Wall Street adage "Sell in May." Like many stock market adages, I remember being introduced to "The Best/Worst Six Months" in The Stock Trader's Almanac. Knowing full well that history is a guide and never gospel, investors wonder if this concern is even more true this year, as it coincides with the four-year cycle low, and the S&P 500 has risen nearly 31 months without a decline of 10 per cent or more, versus the average of 18 months since 1945.

Looking at the average total returns for stocks and bonds, using the S&P 500 and the Barclays Aggregate Bond Index as proxies, we see that while the S&P 500 posted an average 3.3-per-cent increase in both prices and dividends from 1977 to the present, the Barclays Aggregate gained 7.6 per cent. What's more, the frequency of advance (FoA), or percentage of time that the total return was positive, during these six-month periods was higher for bonds at 86 per cent than it was for stocks at 70 per cent. During the nine mid-term election years since 1977, the S&P 500's average six-month total return from May through October fell to 1.3 per cent from the average 3.3 per cent for all years. However, the average total return for the Barclays Aggregate rose to 12.5 per cent during mid-term election years, as compared with its average gain of 7.6 per cent for all years. In addition, the FoA for the S&P 500 fell to 56 per cent during mid-term election years versus 70 per cent for all years, while the FoA for bonds jumped to 100 per cent from 86 per cent.

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For all years from 1991 through 10/31/13, a time period consistent for all four asset classes, gravitating toward the defensive consumer staples and health care groups posted the best average six-month total return of 5.6 per cent, beating the Barclays Aggregate's average of 4.5 per cent and the S&P 500 Low Volatility's 4.4 per cent return. All of these beat the S&P 500's average 2.8-per-cent gain. During midterm election years, however, bonds did best, recording an average 4.8 per cent return that eked out the CS/HC combo's average 4.6-per-cent gain, and far outpaced the Low Volatility's 0.3-per-cent increase, as well as the S&P 500's decline of 0.8 per cent.

So there you have it. Corrections may be delayed, but they will never be repealed. It's just a matter of time. Will it occur now through October? Maybe. So if you embrace the possibility of near-term weakness for stocks, then bonds might be your best bet, provided you are not inclined to eat, smoke, drink or visit the doctor anytime soon.

Read the full report here.

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