How To Play It In May

May 5 2014, 11:42am CDT | by

Is the past prologue? This becomes a difficult question to answer when you have two remarkably consistent historical precedents that seem to conflict with each other in 2014.

In the second year of a four year Presidential term (as is the case in 2014), the stock market has historically been weak, usually forming a bottom in the second or third quarter. This Presidential term behavior for the markets has been very consistent, dating back to World War II. No better year to follow the old adage of “sell in May, and go away”, right?

Not so fast. We also know that in the 60 years since 1954, there were 14 times when the stock market rose at least 20% in a calendar year. And, in the year following these 20%-plus yearly gains, the market rose, on average, more than 10%. If stocks achieve even the average return that this historical precedent would suggest for 2014, the stock market should achieve a significant gain sometime before the end of the year.

So, the question becomes, how do investors play it right now?

With the seasonally weak period for stocks ahead of us, investors might be wise to heed the old adage of selling in May, but with a twist, given that stocks could achieve a decent return by the end of 2014.

Rather than simply selling and sitting on the sidelines, we recommend diversifying growth portfolios into some other areas. It’s worth considering investment ideas that offer solid potential return, plus a reduction in total portfolio risk compared to a portfolio dominated by U.S. growth stocks. Concentrating in a few hot sectors worked well in 2013, but this year broader diversification and risk reduction are in order.

So where to diversify?  Increasing exposure to large-cap value stocks makes a lot of sense in this environment. This area also offers lower volatility and low correlation relative to the high beta stock sectors.

The Guggenheim S&P 500 Pure Value ETF (ticker symbol: RPV) is a particularly interesting way to play this trend, as the past performance of this ETF stands out compared to other large value offerings. By adopting a “pure” value play, this fund emphasizes areas such as energy, financials, and utilities.

Investors should also look overseas to a newer subcategory of emerging markets, termed “frontier markets”. This sector is made up of countries that are smaller and less economically developed than the BRIC countries (Brazil, Russia, India, China) that have become synonymous with emerging markets.

Many of the frontier markets are found in the oil producing Middle East, or in former Eastern Bloc countries that are resource rich. There’s plenty of long range growth potential, but at this point in their development, with volatile swings and less transparency, an investment in the frontier markets likely deserves no more than a satellite position in a portfolio.

Forward Frontier Strategy Investor (ticker symbol: FRONX) seeks to replicate the MSCI Frontier Markets Index and is an attractive vehicle for this category. ETF investors, willing to take on considerably more risk, can also consider iShares MSCI Frontier 100 ETF (ticker symbol: FM).

To achieve even more diversification, investors should consider other areas, beyond common stocks. With the yields on U.S. Treasuries and other bond investments quite low, high yielding preferred securities are favorable in the current environment.

The Market Vectors Preferred Securities ex Financials ETF (ticker symbol: PFXF) offers a high dividend yield (more than 6%) and stability to offset more volatile stock positions in a portfolio. In addition, since this ETF does not invest in preferred securities issued by financial companies, the resulting industry mix (mostly utilities) results in a reduction in risk compared to many of its peers. Preferreds should remain attractive until we get a sustained rise in interest rates.

This year has certainly brought a much different market environment compared to last year, and as a result, investors need a shift in strategy. If the past is prologue, the question remains, which past will play out this year? We believe it’s best to hedge your bets with broader diversification right now.

David Kudla is CEO and Chief Investment Strategist of Mainstay Capital Management, a fee-only, independent, Registered Investment Advisor. More information about his firm can be found at www.mainstaycapital.com. Follow him on twitter at David_Kudla.

Disclosure: Clients and employees of Mainstay Capital Management may hold the securities mentioned in this article in their investment portfolios. The securities mentioned may not be suitable for some investors, based on their tolerance for risk or their investment time horizon.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Britons seek fewer work hours as longer hours injurious to health
London, Nov 28 (IANS) With recent research showing that long working hours can make us ill and ineffective, one in 10 Britons would like to work fewer hours, says a new Office for National Statistics (ONS) survey.
 
 
Iranian woman dances without hijab defying country's laws
Tehran, Nov 28 (IANS) An Iranian woman has defied the country's ultra-restrictive laws by dancing publicly without her hijab (veil), and what is more, it was filmed and posted on social media.
 
 
17th century Polish 'vampire' graves found
London, Nov 28 (IANS) Potential "vampires" in 17th-18th century Poland were buried with rocks and sickles across their bodies to ward off evil, scientists have discovered.
 
 
Human-induced nitrogen pollution big threat to ocean
London, Nov 28 (IANS) Human activity, particularly in industrial and agricultural processes, has had significant impacts on the upper ocean nitrogen cycle, a new study warns.
 
 
 

Latest from the Network

Apple Black Friday Sale Released
The Apple Black Friday 2014 Sale has launched online at the Apple Store. Apple has announced a huge charity promotion to fight AIDS for Black Friday and Cyber Monday. Apple will donate a portion of the sales the company...
Read more on Apple Balla
 
A look at Black Friday video game deals
All major retailers will be getting in the video game Black Friday spirit. PS4 and XBox One will certainly be two consoles that should garner huge sales but actual games should do good as well. One thing that is for...
Read more on Black Friday Countdown
 
Comics looking for event filled Black Friday
While video games and other electronic gadgets look to be the big draw on deals during Black Friday, comic book readers and fans will be able to find their fair share of deals as well. It has been announced that two...
Read more on Black Friday Countdown
 
Anna Kendrick positive after nude photo leak
Anna Kendrick is looking at the positives following the recent hacking of her nude photos. The 'Pitch Perfect' star - whose naked pictures were posted online by hackers earlier this year alongside other stars like...
Read more on Celebrity Balla
 
Benedict Cumberbatch hates selfies
Benedict Cumberbatch hates selfies. The 'Imitation Game' actor - who recently announced his engagement to Sophie Hunter - won't be personally taking any photos of him and his bride on their wedding day and instead would...
Read more on Celebrity Balla
 
James Franco filmed threesome with Zachary Quinto
James Franco and Zachary Quinto filmed a threesome for their new film 'Michael'. The actors took part in the sexy scene alongside the former 'Desperate Housewives' star Charlie Carver for the upcoming drama, according...
Read more on Movie Balla
 
UN condemns attack on British embassy vehicle
United Nations, Nov 28 (IANS) The UN Security Council (UNSC) has condemned the attack on a British embassy vehicle in Kabul, Afghanistan. "The members of the UNSC expressed their deep sympathy and condolences to the...
Read more on Politics Balla
 
Not all mosquitoes can transmit malaria
New York, Nov 28 (IANS) A genetic study has revealed that certain species of mosquitoes have evolved to better transmit malaria than even some of their close cousins. The study may advance understanding about the...
Read more on Business Balla
 
Rio judge ends Olympic golf course impasse
Rio de Janeiro, Nov 28 (IANS) A Rio de Janeiro judge has rejected a request by public prosecutors to suspend an environmental permit for work on the 2016 Olympic golf course. Judge Eduardo Antonio Klausner said there...
Read more on Sport Balla