With
a disappointing finish on Thursday, the stock market closed what was by
some measures its worst month in two years. Over five dismal weeks,
Facebook fizzled, a debt crisis in Europe loomed, and nobody was in the
mood to buy.
When May was mercifully over, the Dow Jones
industrial average and other major indexes had erased most of the strong
gains they built up through March and held on to in April.
“The
sentiment has changed,” said Craig Callahan, co-founder and president of
ICON Advisers in Denver. “Any time the market dips like this, it erodes
some confidence. It scares people out of the market. All of the above,
May has done that.”
The Wall Street
adage that investors should “sell in May and go away” may not be sound
strategy all the time — many financial advisers say it’s foolish — but
this year it looked like good advice.
The Dow lost 820 points for
the month, its worst showing since May 2010. That month, investors were
spooked by a one-day “flash crash” in stocks when a large trade
overwhelmed computer servers.
This May, stocks limped to the
finish. The Dow closed down 26.41 points on Thursday to end the month at
12,393.45. It declined on all but five of 22 trading sessions.
The
Standard Poor’s 500 index dropped 2.99 points to close at
1,310.33. It fell 6.3 percent in May, its worst month since September.
The Nasdaq composite index fell 10.02 points to 2,827.34, and had its
worst month in two years.
On Thursday, investors latched on to a
sliver of good news in the morning: May sales from retailers like Target
and Macy’s looked healthy, and sent stock futures higher.
Then
the government offered two unpleasant pieces of economic data. The
number of people applying for unemployment benefits rose to a five-week
high, and economic growth from January through March was slower than
first thought.
Underscoring the crisis in Europe, the head of the
European Central Bank, Mario Draghi, told European leaders that the
setup of the 17-country euro currency union was unsustainable “unless
further steps are taken.”
The Dow was down as much as 103 points
and up as much as 70 before ending slightly lower. Energy companies were
the worst performers for the day and the month. The price of oil, which
ended April at almost $105, ended May at $86.53.
Worried about
Europe and the weaker readings on the U.S. economy, investors continued a
stampede Thursday into U.S. government bonds, which they see as a safer
place to put their money.
The yield on the benchmark 10-year U.S.
Treasury note tumbled to its lowest level on record, 1.54 percent. The
yield rose later in the day to 1.57 percent. It was 1.62 percent on
Wednesday.
The 10-year Treasury yield was 1.55 percent in November
1945, after the end of World War II, when government price controls
kept interest rates down to preserve financial stability.
In the
stock market, the “sell in May” strategy posits that investors can make
more money by sitting out the summer and early fall, when prices tend to
languish.
The math is compelling. From 1926 through last year,
the SP 500 rose an average 4.3 percent in the six months of May
through October, versus 7.1 percent in November through April.
The problem, critics point out, is that stocks move widely above and below their averages from year to year.
One
researcher, Larry Swedroe of Buckingham Asset Management, found that
“sell in May” beat an ordinary strategy of buying and holding stocks if
you started investing in 1960, 1970 and 2000, but not if you started in
1950, 1980 or 1990.
But this time, at least, it would have worked.
Investors who bought stocks exactly according to the Dow last Nov. 1
and sold them on April 30 would have gained 13 percent. Investors who
held on through May would have seen those gains cut in half.
For
the calendar year, the limp May left the Dow up 1.4 percent, the SP
up 4.2 percent and the Nasdaq up 8.5 percent. Two months ago, all three
indexes were up more than twice as much.
The month’s most
spectacular market blunder was Facebook, which debuted on the Nasdaq
exchange May 18 at $38 a share. By Thursday’s close it had fallen more
than $8 from there.
The stock’s first day was complicated by
technical problems at the Nasdaq, and questions later emerged about
whether Morgan Stanley, which helped take the company public, had
offered some clients better information about the stock.
JPMorgan
Chase stock lost 23 percent of its value during the month after the bank
disclosed a surprise trading loss of $2 billion or more — a black eye
for CEO Jamie Dimon, who has built a reputation as a master of risk
management.
Then there was Europe. Troubles in Greece dominated
headlines for much of the month, but Spain has been the market’s
albatross this week. It will have to spend almost $24 billion to bail
out one of its biggest banks.
There is still no agreement over how
to solve the crisis: Stronger countries like Germany want governments
to cut spending, but voters in weaker countries like Greece have shown
they are in no mood for more fiscal pain.
On Thursday, the
European Union demanded that Spain provide more details about how it
plans to finance the overhaul of its banking sector.
Spain’s key
stock market index was flat, while Greece rose nearly 3 percent.
Borrowing rates for Spain fell somewhat, suggesting investors were
feeling a little better about that country’s finances.
“Greece is a
failed chemistry experiment,” said Michael Strauss, chief investment
strategist at the Commonfund investment firm in Connecticut. “But we are
more worried about Spain because of its size and the scope.”
Strauss
said he advised clients to take money out of stocks in early spring,
when the SP was above 1,400, or about 90 points higher than where
it closed Thursday.
Strauss expects the index to return to 1,385 before the year is over, though he cautioned those gains might not last.
May’s
results are a familiar template. In both 2010 and 2011, the market rose
for several months before falling in May because of concerns about debt
in Europe.
Linda Duessel, market strategist at Federated
Investors in Pittsburgh, argued that this May’s declines were only
natural after the run-up at the beginning of the year.
“After you get a good run, you get a correction,” Duessel said. “Corrections are a very normal part of the cycle.”
Among the stocks making big moves Thursday:
- Talbots, the women’s clothing chain, rose $1.15, or almost 90 percent,
to $2.44 after announcing that it will be bought by a private company,
Sycamore Partners.
- TiVo, the maker of digital video recorders, fell 42 cents, or 4.7 percent, to $8.54 after posting a first-quarter loss.
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