May 31, 2019
By Sinéad Carew
(Reuters) – “Sell in May and go away” is a popular saying on Wall Street that arises from the S&P 500’s historical underperformance from May through October. Given the host of uncertainties fueling fears of a global slowdown, this could be one of the years when the adage holds true.
Since many investors take time off during the summer, trading volume tends to ease and appetite for stocks during the period lessens. That in turn can increase volatility, strategists say.
Accompanying this year’s summer effect are an escalating trade war between the United States and China, U.S.-Iran tensions and Britain’s uncertain exit from the European Union. U.S. President Donald Trump added to the tensions late Thursday by vowing to impose tariffs on all goods from Mexico, a threat that all but cements the first monthly loss for major U.S. indexes this year and first May decline since 2012.
Stock rallied in the first four months of this year, surging 17.5%, but the benchmark S&P index reversed course in May as hopes for a U.S.-China trade deal faded on pledges for more tariffs from Trump.
In total the S&P 500 fell 6.6% in May, its biggest May decline since 2010.
“The fact we had a big first four months and May has been weak tells us the market is behaving very close to seasonal historical patterns,” said Jeffrey Hirsch, editor-in-chief of the Stock Trader’s Almanac, a handbook for investors.
Hirsch says the S&P could rebound slightly in June, but he expects weakness from July through October.
Since 1950, the S&P 500 has on average gained 1.4% in the May-October period, compared with 7.1% between November and April. In those nearly seven decades, the S&P’s performance was stronger from November to April than May to October 65% of the time, according to data from Hirsch.
He pointed to 44 S&P declines between May and October versus 15 declines between November and April since 1950. The last S&P May-through-October decline was in 2015.
A big decline in May does not, however, necessarily point to big losses in the summer, according to Bespoke Investment Strategist co-founder Paul Hickey.
Bespoke’s data shows that if an investor bought the S&P 500 index at the start of November and sold at the end of April every year starting in 1928, they would have chalked up a 4,661.6% gain by April 30, 2019, against a gain of 185% in the May-October period.
The difference starting in 1945 is even more dramatic, according to Hickey, with a 8,670.8% gain for November-April compared with 101.5% for May-October.
(Graphic: May-October S&P historic gains lag far behind Nov-April link: https://tmsnrt.rs/2KoArYv)
Sam Stovall, chief investment strategist at CFRA, is hoping for a “reflex rally” in June but expects stocks to “trade sideways or lower” in the third quarter.
“Trade discord could be the catalyst for why the third quarter is weak,” said Stovall. “A lot of people are worried it could throw us into global economic softness if not outright recession.”
This year, many investors say concerns about the tit-for-tat U.S.-China trade tariffs will weigh on stock markets far more than typical seasonal pressures.
“The path of least resistance is likely lower for a while because we think the trade war will go on for some time,” said Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas. “But when you have an overwhelming macroeconomic influence like a trade war or a recession, that’s going to overwhelm seasonal patterns.”
After May’s sell-off, investors are laser-focused on trade and clues on the Federal Reserve’s interest rate policy, said Kristina Hooper, chief global market strategist at Invesco in New York.
“Whether investors go away for the rest of the summer has a lot to do with two factors: trade news flow and what the Fed does,” said Hooper.
Since the S&P rose so much in the first four months, Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina, is betting that monthly declines will continue.
In the four years out of the last 50 that the S&P has dropped by more than 5% in May, it also dropped that amount twice in June, he said.
“We’re not out of the woods in terms of market weakness. Investors should still be on heightened alert for more of a pullback,” said Detrick.
(Additional reporting by April Joyner and Chuck Mikolajczak; Editing by Alden Bentley and Tom Brown)