7:04 p.m. EDT May 31, 2013 NEW YORK — If you followed the Wall Street maxim "Sell in May and go away," you missed out on a 2% gain as the Dow Jones industrial average surged to record highs in May. But if you're kicking yourself about poor market timing or still thinking of taking some chips off the table, don't despair.The reason?
June happens to be the worst-performing month for the Dow the past 20 years, falling 0.8%, on average, and finishing the month higher only 40% of the time, according to Bespoke Investment Group. It also is the second-worst month going back 50 years.
In short, June is more of a dud than May.
May gets its reputation as a good time to sell because it marks the start of what historically has been the worst six-month stretch (May-October) for stocks. So just because stocks didn't stick to the script and dip in May, doesn't mean June, or the next five months, are going to be profitable for stock investors, history suggests.
"If there's a month when the bears have a chance of winning this year, it's probably (June)," notes Paul Hickey, co-founder or Bespoke Investment Group.
Past seasonal weakness is just one reason why June could potentially turn out to be a rockier month for stocks, which continue to defy skeptics by climbing in the face of a so-so economy and an inevitable move by the Federal Reserve to reduce its market-friendly stimulus.
The broad U.S. stock market, which has finished up seven straight months for the first time since the bull market began in 2009, has exhibited signs of sagging momentum in recent sessions. The Dow fell in two out of three sessions after hitting a fresh record closing high of 15,409.39 on May 28.
Investors have cooled their purchases of stocks amid renewed uncertainty over the Fed's timetable to start "tapering," or paring back, its quantitative-easing bond buying. Jurrien Timmer, a portfolio manager at Fidelity Investments, says investors' sudden aversion to stocks is due to a "Taper Tantrum."
Getting hit the hardest are defensive stocks, such as high-yielding, dividend-paying stocks, or so-called "bond proxies," like utilities.
Investors are wary because the Fed's $85 billion in monthly purchases of mortgage-backed bonds and long-term U.S. Treasuries have not only driven down borrowing costs and bond yields, but have also been a boon for stocks.
Why? It has created the perception that stocks, with their potential for higher returns, are the best place to park money for investors in a low-yield world.
The fear is that stocks are nearing a top and will suffer a pullback once the Fed takes its foot off the so-called stimulus accelerator pedal.
Still, despite a heated and public debate at the Fed as to when to start dialing down its asset purchases, most Wall Street players don't expect the central bank to start slowing its bond purchases until early 2014.
The Fed is unlikely to move swiftly, they argue, largely because the economy is still growing at a subpar rate and the job market has yet to pick up enough steam to reduce the unemployment rate, which likely hasn't fallen much, if at all, from April's 7.5% rate. The Fed has said it would not start raising short-term interest rates, now paying roughly zero interest, until the jobless rate falls to 6.5%.
"All the Fed rhetoric," says Bill Hornbarger, chief investment officer at Moneta Group, "is a reminder that the big buyer (the Fed) of bonds won't be there forever."
Another worry for stock investors is that long-term Treasury yields will spike sharply as bond investors start selling ahead of the Fed's expected exit from the market or because they see signs the economy is picking up enough steam to force the Fed to tighten policy more sooner rather than later.
On May 31, the yield on the 10-year Treasury spiked as high as 2.21%, its highest level since April 2012, before dropping back to 2.1. A disorderly, rapid rise in rates could spook investors. It could also slow the economic recovery and housing rebound.
Bulls say rising rates are a positive because they would signal increased confidence in the strength of the recovery, which included better-than-expected May readings Friday on Chicago manufacturing and consumer confidence.
Adding to the angst is the big market drop in Japan stocks the last week of May. The Nikkei 225 is down more than 10% from its 2013 high and firmly in correction territory. The heavy selling, which has alarmed some traders, is blamed on fears that Tokyo's aggressive steps to stimulate its moribund economy may prove unsuccessful.
On the bright side: the stock market has risen an average of 0.6% in June when stocks were up 10% for the year at the end of May. That's where they are now, Bespoke says.
