Stock market crash 2011: get out around July?

Legendary investor Jeremy Grantham of GMO LLC, partly in jest, suggested that investors should consider selling their stocks around July 2011.

He said going back to 1960, the first 7 months of the third year of a presidential cycle (like 2011) produced inflation-adjusted returns of 20 percent for the 48-month presidential cycles. Meanwhile, the remaining 41 months of the cycle returned only 1 percent.

Therefore, Grantham suggested in jest that investors should “sell in May of Year 3 and go away for 41 months,” a variation of the Wall Street adage of “sell in May and go away.” Going by Grantham’s 48-month cycle pattern, the sell date would be July instead of May.

In addition to this historic tendency, he listed four more reasons to get out around this time period.

One, there is still the risk of the Middle East and North Africa unrest spreading to important oil producers like Saudi Arabia.

Two, Japan’s earthquake-tsunami disaster can potentially have a prolonged impact on the global production of “certain small [production] parts” for which Japan holds a “near-monopoly” in.

Three, the Federal Reserve’s program of QE2 is ending on June 30, 2011. Prominent investors like PIMCO’s Bill Gross are so bearish on this development that he is now short Treasuries. If Treasuries do decline and yields go up, it could spell disaster for the stock market and economy.

Four, the “relentless rise in resource prices is beginning to act as an economic drag.”

Previously, Grantham thought the Federal Reserve’s loose monetary policy could carry the stock market until at least October 2011. However, due to the combination of the factors listed above, he has turned bearish. He said “now is not the time to float along with the Fed, but to fight it.”

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