If You're Really Afraid of the "Sell in May" Thing....
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While the dangers of staying invested during the summer doldrums are overblown, it's not like there's an entirely unreasonable basis for the "Sell in May and go away" axiom. The downside is, the market only averages a return of 0.6% between the end of April and the end of September. The upside is, if you take out the worst 10% of those May-September spans, the average return for the five-month period cranks up to a decent 2.6%.
In other words, the odds of the middle part of the year being a loser are actually pretty low, but if the bear does get the market in its clutches, than hang on, 'cause it could get ugly.
It's a conundrum to be sure... do you stay in and assume things will be ok as they are the majority of the time, or is this year going to be one of those magnificent-nasty expectations?
There's a third option few investors really open their eyes to though, and that's entirely avoiding the summertime dance with domestic stocks. See, that whole "Sell in May" thing is largely a U.S. phenomenon. Though the United States market affects and is affected by foreign equity markets, overseas stocks circumvent our seasonal tendencies. The solution to the summertime doldrums, then, is a healthier-than-average dose of foreign-market ETFs.
And yes, I just so happen to have a hanfdul in mind, along with more rationale than you were bargaining for.
iShares MSCI Israel Capped Investable Market ETF (NYSEMKT: EIS)
It may be the 40th largest economy in the world, but the fact that it's so far down the size list and it still plays host to the second-biggest number of venture capital firms (the United States is still first) speaks volumes about how entrepreneurial Israel is. The fact that the country's GDP grew by 4.7% last year while most every other nation was struggling speaks volumes about how much the Israeli's achieve under that entrepreneurial umbrella.
The real story for investors here, however, isn't Israel's economic report card. It's the stunning values of the companies that make up the ETF. The trailing P/E ratio for the fund's holdings is a ridiculous 5.1.
How'd the market let these stocks slide that far in the first place? Great question. Part of the answer is the 25% selloff the country's stocks suffered in August of last year, fueled by the United States' looming debt crisis, and some civil unrest within the nation's borders. It was an unnecessary pessimism though; earnings never even flinched.
It should come as no real surprise, however. The nation has learned to survive and even thrive in the most adverse of geopolitical challenges. A little foreign (to them) debt disruption and some demonstrations is minor to most of the challenges thrown its way.
More important than that though, the fund itself is just not starting to come out of its unmerited funk it fell into last August, as investors begin to acknowledge that earnings aren't shrinking, and that the single-digit P/E doesn't adequately reflect Israel's foreseeable future.
iShares MSCI Australia Index Fund (NYSEMKT: EWA)
Like the iShares MSCI Israel Capped Investable Market ETF, the iShares MSCI Australia Index Fund also struggled more than its fair share last year. All told, it didn't stop its bleeding until it had given up 28% of its peak price. Though it's recovered more than the Israel fund has in the meantime, it's still closer to last year's low than it is to last year's high.
Not that it's the only industry represented in the exchange-traded fund, but coal miners occupy a large space in this portfolio. But isn't coal dead, especially now that China's growth is slowing? Yeah, well, both of those rumors are somewhere between misleading to downright errant.
It is true that some coal is seeing a steep dropoff in demand. That's largely a North American phenomenon though, and really only applies to thermal coal... the kind used to generate electricity. Elsewhere, coal - metallurgical as well as thermal - is still in demand. In fact, with 90 gigawatts of new coal-powered plants coming online this year, the world's going to be consuming an estimated 300 million more tons of it per year.
As for China, its need for coal is anticipated to fall in the current quarter, at least according to some experts. Yet, it's interesting that the alleged crimp in demand has yet to show up in the numbers. Last quarter, China's coal demand was higher by 6.3% on a year-over-year basis. That higher consumption rate lasted all the way through March too, and was seen in every coal-using industry, from power to steelmaking to cement.
Great, but what's that got to do with Australia? It's a heck of a lot easier to get coal from Australia to China than it is from anywhere else that has it in bulk quantities. BHP Billiton (NYSE: BHP) - one of Australia's biggest coal producers as well as a major constituent of the ETF - started getting pounded last year on fears of a Chinese slowdown, but guess what? BHP is still selling coal to China, and doing so profitably. The only difference between then and now is, the P/E is a mere 8.74. Investors are starting to see the error though, and starting to believe in that 12% earnings growth forecast again.
Thing is, it's not just Australia's coal miners that struggled in the shadow of mere worries about a slowing Chinese economies; a bunch of Australian stocks took hits for no good reason, sending the average P/E for this fund's holdings down to 11.85. But, with the country's estimated GDP growth rate of 4.0% for the past twelve months and expected growth rate of 3.75% for the next twelve, the market's due for renewed strength.
iShares Dow Jones U.S. Utilities ETF (NYSEMKT: IDU)
Last but not least, if you're looking for a good summertime pick to overcome the market's summertime blues, put the iShares Dow Jones U.S. Utilities ETF on your radar, if not in your portfolio.
It's a myth that utility companies are relatively more profitable than other types of companies in the summertime than other sectors are. Yes, many power providers do see a bump in billable kilowatt hours, but this revenue surge is actually quite predictable, and consistent.... nothing that makes or breaks a company.
So what's the big deal about the sector in the summertime? More than anything, it's perception. Investors are thinking defensively in the middle of the year anyway, and looking for safe havens. As a result, the sector performs better between May and September because - you got it - investors think it'll do better. It's called a self-fulfilling prophecy, which occurs for the market more often than you might care to believe.
If you're looking for numbers though, try these on for size - over the past ten years, the iShares Dow Jones U.S. Utilities ETF has returned an average of 0.1% between the end of April and the end of December. It doesn't sound all that great, but compared to the market's overall average return of -2.2% for the same timeframe during the same period, it's better than a sharp stick in the eye.
Or if that doesn't do it for you, maybe this will - the average yield on utility stocks now stands at an unusually high rate of 3.9%.
In all three cases, the fund is starting to perk up. Not that long-term investors should worry too much about timing, but given that these ETFs have also recently crossed above or pushed off of the all-important 200-day moving average line right as the U.S. market is plowing into a weak period, you may want to make them a "sooner than later" affair.
jbrumley has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.