by Gary Alexander
June 2, 2021
The month of May has historically been flat for stocks, and this May was no exception. The S&P 500 rose just 0.47% this May. Although the Dow rose 1.93%, NASDAQ fell -1.53%, so May remained a “wash.”
Over the last 20 years, June has been worse. It is tied with September as the worst month (-0.71%) in the Dow, declining in 12 of the last 20 years. In the last century, June has been mediocre at best (+0.41%).
Here’s the monthly track record going back the last 20 to 100 years from Bespoke Investment Group:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Looking forward to the summer months, the recent historical record doesn’t look much better. The five-month period from May to September looks especially dismal in the last 20 years, averaging -0.3%
This backs up the old chestnut, “Sell in May and Go Away,” which I have debunked often here. Trading by calendar rules – or any other form of market timing – tends to be a loser’s game. If you want to apply historical trends, try thinking in terms of “be more selective in summer” or (for compulsive traders) “stop watching prices every day and take a vacation.” Whatever you do, take time to look at some more details:
Bespoke’s tables (above) use the Dow index, since it goes back 100 years, unlike the S&P 500 (launched in 1957), but what if we use the S&P 500? How would “Sell in May” fare during the last five years?
||April 30 to October 31 Gains
| Average Gain
|Data source: Yahoo Finance, using the S&P 500
Surprise! June was positive in the last five years, and “Sell in May” was a losing proposition, especially last year, when the gains from May 1 through October 31 exceeded 24%. What’s going on here?!
Part of the problem with these historical “rules” is that the past is truly no guarantee of the future: If you toss “heads” 10 times in a row, the chances of tossing either heads or tails the next time is still 50%.
By the same token, June was flat or negative 12 of 15 times from 2001 to 2015, but that in no way predicted the next five Junes, which were ALL positive in the S&P 500. Forget the historical pattern.
Another part of the problem is that any measurement of markets over the past 70 years or more must use the Dow Jones Industrials since the S&P 500 was not formulated until 1957, so constructing a 100-year track record for an equivalent of the S&P is problematic, and yet the Dow is a very narrow, flawed index.
The Dow Turned 125 Last Week – Is it Time to Retire?
The Dow Jones Industrial Index was formed on May 26, 1896, so it turned 125 years last Tuesday. In those 125 years, it gained a nominal 83,737%, rising from 40.94 to 34,323.05. That works out to an average annual increase of 7.69% a year, compounded, despite some memorable catastrophes in 1929 and 1987, but these dizzy declines were more than offset by five decade-long bull markets of 250% or more.
In fact, we’re approaching the centennial of the starting date of the Dow’s biggest bull market on August 24, 1921, notably after the worst global pandemic in the last two or three centuries, the worst world war to that date, a 33% Dow decline in 1920, a “flash depression” in 1920-21, the launch of Prohibition, a lame duck President (Woodrow Wilson) that was victimized by a massive stroke during his last 17 months in office, an anti-immigrant “Red Scare” that labeled most immigrants as subversive threats, the rise of the Ku Klux Klan, a rigged World Series by the Chicago “Black Sox,” and too many other social ills to count.
But when we least expected it, people ripped off their face masks and abandoned all social distancing to launch dance marathons in the ‘Roaring 20s,’ as the stock market gained nearly 500%, its best rise ever:
|The Dow’s Five Best Decades:
||Start and End Months
||Gains and Bull Market Length
| The 1920s
|| August 1921 to September 1929
|| +496.5% in 8 years, 1 month
| The 1990s
|| October 1990 to January 2000
|| +395.7% in 9 years, 3 months
| The 1950s
|| June 1949 to December 1961
|| +354.8% in 12 years, 6 months
| The 2010s
|| March 2009 to February 2020
|| +351.4% in 9 years, 11 months
| The 1980s
|| August 1982 to August 1987
|| +250.4% in 5 years
|Source: Wall Street Journal, “Dow Celebrates 125 Years as Wall Street Icon,” May 27, 2021
The Dow has some advantages and several drawbacks. Its biggest drawback is that it measures just 30 stocks, too small a sample, and unlike the S&P 500, it is not “cap-weighted” (where bigger stocks carry more weight). The Dow’s biggest stock, Apple, worth $2.1 trillion, makes up just 2.43% of the Index (even less than 3.33%, the average for each of the 30 stocks), but a Dow healthcare stock UnitedHealth Group Inc., with a market cap under $400 billion makes up 7.92% of the index, because the Dow is computed based on the stock’s price. Since the healthcare stock trades at a lofty $413 a share, its leverage within the Dow is 3.25 times more than Apple, at $127 a share, even though Apple has 17 times more shares and 5.4 more market cap.
Still, we won’t be sending the Dow out to pasture – any more than we’ll exchange Celsius for Fahrenheit or start talking meters instead of feet and inches. Old habits are hard to break. The general public likes the big, round Dow numbers and the drama of a 1,000-point drop rather than an equivalent 120-point drop in the S&P 500. But the professional world will continue watching and citing the S&P more than the Dow.
Navellier & Associates does own Apple Computer (AAPL) and UnitedHealth Group Inc. (UNH). Gary Alexander does not own Apple Computer (AAPL) and Unitedhealth Group Inc. (UNH) personally.