Debunking “Sell in May and Go Away”

The familiar Wall Street adage “sell in May and go away” suggests that investors should sell their stock holdings in May to avoid a seasonal decline in the market and then reinvest in the fall.

This saying is based on historical data showing that stocks tend to perform better from November to April than from May to October.

However, this advice often proves incorrect. Market conditions, economic factors, and geopolitical events all influence stock performance regardless of the calendar month.

In the current year, despite the traditional warning, the S&P 500 and NASDAQ have both seen significant gains in May. This highlights that rigidly following the “sell in May” strategy could lead to missed opportunities.

The market’s behavior is affected by a complex interplay of factors, and a more nuanced approach to investing, considering current economic indicators and individual goals, is often more effective than adhering to old adages.

I expand on this topic, below. First, let’s look at the most important driver of stock market performance: corporate earnings.

Strong Top-Line Performance

First-quarter 2024 earnings season is wrapping up, with about 96% of S&P 500 companies having reported their results. Earnings are projected to grow by approximately 6% year-over-year for the first quarter, which would mark the fastest quarterly growth rate since Q2 2022, according to research firm FactSet.

At the sector level, the familiar leaders of corporate profit growth are information technology, communication services, and consumer discretionary sectors, with each sector expected to achieve 20% or more in year-over-year earnings growth for the first quarter.

Notably, there has been substantial earnings growth outside of these typically growth-oriented sectors. Utilities are on track to increase their first-quarter earnings by 30% year-over-year, while the financial sector is expected to see a 9.4% rise.

For the entire year, the S&P 500 is anticipated to grow earnings by just over 11%, with most sectors predicted to experience positive earnings growth.

I believe the economic environment will continue to support corporate profit growth, which should in turn bolster stock performance in the coming months.

That said, rising bond yields this week have been dampening investor enthusiasm. The benchmark 30-year U.S. Treasury yield has ticked higher, as the following chart shows:

Bond yields and stocks tend to move in opposite directions. The increase in bond yields can be traced back to underwhelming Treasury auctions and hawkish remarks from Federal Reserve officials, which suggest that interest rates might remain elevated for an extended period to combat inflation.

Meanwhile, Asian markets are experiencing a downturn, and European markets are also sliding in reaction to mixed inflation data from Germany. In the commodities sector, both oil and gold are facing downward pressure.

Sell in May? Not So Fast…

This May, the well-known saying “sell in May and go away” has proven to be misguided advice. The S&P 500 has risen nearly 5% this month, while the tech-heavy NASDAQ has surged about 8%. Small-cap and mid-cap stocks have also performed well, with the Russell 2000 index up over 3% and the Russell mid-cap Index gaining about 1.5% during the same period.

Internationally, both developed and emerging markets have shown strong performances in May, with the MSCI EAFE and MSCI EM indices each climbing around 4%.

After a difficult April, where U.S. investment-grade bonds fell by 2.5%, the Bloomberg U.S. Aggregate Bond Index has rebounded by roughly 1.3% in May, recovering some of the previous month’s losses.

I anticipate that U.S. economic growth may slow, but it will likely remain positive, creating a favorable environment for equity markets in the months ahead. I recommend underweighting U.S. investment-grade bonds and overweighting U.S. mid-cap stocks.

Additionally, I prefer the relative quality and momentum of U.S. large-cap stocks over emerging-market stocks and favor emerging-market debt over U.S. high-yield bonds.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.