Stocks Defy ‘Sell in May’ with Spring Rally, But Summer Gains May Be Tough
Contrary to the time-honored Wall Street adage “sell in May and go away,” the U.S. stock market is exhibiting strong performance this spring. The Dow Jones has recorded its longest winning streak since December, while the S&P 500 has almost entirely recouped its April losses. This defiance brings into question the efficacy of the traditional strategy, which advocates for selling stocks at the end of April, shifting towards cash or fixed-income assets, then re-entering the market later in the summer.
Interestingly, Deutsche Bank data reveals that staying invested in the S&P 500 from the end of April through the beginning of September has historically produced returns comparable to those achieved by following the ‘sell in May’ strategy and investing in bonds instead. Moreover, redirecting investments into cash during the same period has generally resulted in notably lower returns.
This month’s stock market performance poses a significant challenge to the ‘sell in May’ thesis. The S&P 500 has risen by 3.7%, closely approaching its mid-March peak, while the Nasdaq has surged by 4.87%. The Dow Jones is not far behind, enjoying an eight-session win streak with a gain of over 4.5%, eyeing the 40,000 point milestone with anticipation.
Investor sentiment appears to be optimistic as indicated by Bank of America’s Flow Show report, which highlighted that last week saw the largest influx of funds into equity portfolios since mid-March, totaling $14.8 billion. Concurrently, bond funds experienced their most significant weekly inflow in nearly three years, totaling $17.8 billion. This dual influx suggests investors are betting on a softening economic stance, with slowing growth and subsiding inflation expectations potentially benefiting fixed income markets.
However, upcoming economic data, such as the Commerce Department’s April inflation report and retail sales figures, will be closely monitored for indications of these trends. Despite some economic forecasts suggesting growth, the equilibrium between combating inflation and supporting a slowing economy presents a complex challenge for the Federal Reserve.
Further complicating the stock market outlook are current Treasury yields, which have heightened the challenge of achieving returns from equities. Comerica’s chief investment officer pointed out that the narrow equity risk premium currently indicates lower potential gains from stocks compared to safe-haven Treasuries, making stock market investments less appealing in light of higher bond yields.
Yet, there’s a silver lining as corporate profits continue to exceed expectations. If this trend persists, it could provide sufficient justification for stock valuations, keeping interest in the equity markets buoyant. The months ahead, incorporating the remainder of the first-quarter earnings season and the beginning of June-quarter updates, are crucial for determining the market’s trajectory, especially in anticipation of the Federal Reserve’s June policy meeting which will offer updated economic projections.
In summary, while the ‘sell in May and go away’ strategy is not getting much support from the current market trends, the coming months present several economic uncertainties that could temper stock market gains. As the Federal Reserve navigates its dual mandate of fostering economic growth and maintaining price stability, investors remain on alert for any signs of stagflation that could influence market dynamics, potentially limiting stock market gains through the summer.
