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The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By Frank Holmes
NEW YORK (
U.S. Global Investors) -- One catchy investing maxim that's popular at this time of year is "Sell in May and go away," which urges investors to cash in their holdings and take off the summer.
Historically, this hasn't been a bad strategy. You can see from the following chart that June, July, August and September have been the worst four months of each year for the
S&P 500 index since 1988.
Since 2000, the June-September period for the S&P 500 is split. Half of the years saw positive returns, while the other half were negative. Historically, you have only about a 50-50 chance for a gain during those months, while your odds are roughly 10% better during the rest of the year.
The trend is less consistent for emerging-market stocks. You can see that the median monthly return for the MSCI Emerging Markets Index since 1988 is negative for June and August, but positive for July and September. The frequency of positive returns during the June-September period is roughly 6% lower than the rest of the year.
Last year, investors who employed the "Sell in May" strategy averted an almost 17% drop in the S&P 500 and a nearly 25% drop in the MSCI Emerging Markets Index from June-September. Summer of 2010 was a similar experience.
With last year fresh on the minds of investors, should they take off this summer? We don't think so.
We believe it's a much better market this year. After following a similar trajectory as the previous year from October to the beginning of March, improving economic data pushed the S&P 500 more than 3% higher in March 2012 after it trended sideways during the same period a year before.
Real GDP in the U.S. grew 2.2% during the first quarter of 2012 vs. 0.4% during the first quarter of 2011, and several areas of the economy are much stronger than they were a year ago. Nonfarm payrolls (up 29%), ISM manufacturing (up 2%) and auto sales (up 8%) have all improved from a year ago, according to J.P. Morgan. In fact, auto sales are currently at a four-year high.