Sell in May and go away? Not this time



By Jeff Pantages

Alaska’s Eye on Wall Street/For the Journal


Not this time. The large cap S&P 500 Index gained 2.4 percent in May and has provided a 5 percent total return year to date. REIT stocks that invest in commercial properties like office buildings and retail centers have been on fire, gaining 16.4 percent so far this year. After jumping 41.3 percent last year, smaller cap stocks have lost 1.4 percent through May.

Bonds have been a big surprise this year with yields falling 0.6 percent on the 10-year Treasury to 2.48 percent. The broad based Barclays U.S. Aggregate Bond Index has almost matched the stock market in terms of performance, up 3.9 percent year to date. International sovereign bonds have done even better. The yields on Italian and Spanish sovereign debt are now below 3 percent after having traded well north of 7 percent only two years ago.

All of this despite the fact that first quarter GDP in the U.S. declined at a 1 percent annual rate (Editor’s note: the first quarter GDP has since been revised down again, this time to a 2.9 percent decline). It really is the rear view mirror though and very much a bad weather related decline. The consensus forecast for second quarter growth is north of 3 percent. Economists are blissfully unworried and believe modest growth and low inflation worldwide is in the cards.

Of course that may spell complacency. In fact, analysts note that since 1969, the S&P 500 has dropped by 1 percent or more 27 days a year on average. In the past 12 months, there have been only 19 such days. The VIX index of stock market volatility is bouncing around 25-year lows. There are signs of investors reaching for yield given the unexpected decline in rates so far this year.

The Bet by Paul Sabin

This is a terrific book that revisits the debate between celebrity biologist Paul Ehrlich, and economist Julian Simon. The author writes:

“Ehrlich, author of the landmark book The Population Bomb (1968), predicted that rising population would cause overconsumption, resource scarcity, and famine — with apocalyptic consequences for humanity. Simon countered that human welfare would flourish thanks to flexible markets, technological change, and our collective ingenuity.”

Needless to say Ehrlich was wrong on most counts yet he received much more fame and fortune than Simon. The Stanford professor appeared on the Johnny Carson show 20 times and received literally millions of dollars in personal awards.

When Walter Hickel was named Secretary of the Interior under President Nixon, Ehrlich wrote that the appointment of Alaska’s pro-development governor “was enough to make any conservationist’s toes curl.”

Simon was a more obscure University of Illinois professor. He started out in Ehrlich’s camp but then the data convinced him that population growth had not undermined economic growth. He said “more population means more creators and producers.”

In 1980, the two antagonists entered into a bet. Simon allowed Ehrlich to pick any five commodities that he liked. Ehrlich believed that resources were finite and that we were running out of everything, so he bet that prices would be much higher. Simon thought that prices would be lower 10 years from that date due to substitution effects and new discoveries.

In October 1990, Simon received an envelope in the mail that contained “a sheet of metals prices along with a check from Paul Ehrlich for $576.07. There was no note.” Prices of the five metals chosen — chromium, copper, nickel, tin and tungsten — had fallen by an average of 50 percent.

This debate echoes controversies today about global warming and forecasts of secular stagnation. We will always have things to worry about. But the past suggests that mankind has a remarkable ability to solve problems and overcome adversity.


Jeff Pantages is the chief investment officer for Alaska Permanent Capital Management, a $2.4 billion investment firm in Anchorage.


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