May 15, 2023
Every year as the calendar turns to spring, the well-worn investing adage “sell in May and go away” inevitably reemerges as a topic of conversation among investors and market watchers, alike.
There’s reason for investors to be curious: Historically, stocks' best six-month rolling period tends to come between Nov. 1 and April 30. Some investors may choose to roll out of stocks and into fixed income from May 1 through Oct. 31, which is historically the weaker period for stocks.
So, will the “sell in May and go away” strategy be proven right for 2023?
Here’s our take on how investors should think about this investing approach, and what factors could be the real drivers of stock prices from May to October in 2023.
Will historical patterns hold true from May to October?
Source S&P Dow Jones Indices, American Enterprise Investment Services, Inc. Returns are annualized and are based on the S&P 500 Price Return Index and assume that the Index was held for the months indicated each year. Past performance is not a guarantee of future results. Data period: 4/28/1973 – 4/28/2023. An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The rate of return shown is for illustration purposes only and is not meant to represent the past or future returns of any specific investment or investment strategy, or to imply guaranteed earnings. This illustration does not reflect sales charges or other expenses that may be required for some investments.
Investors certainly would have enjoyed avoiding the punishing declines stocks took in June, August, and September last year if they sold in May. But it’s important to note that following a Sell in May and Go Away philosophy has been met with mixed results in recent years. Specifically, this approach wouldn’t have worked as well in 2021 and 2020.
In our opinion, investors should avoid allocating their portfolios based on such historical trends. Instead, they should use such information as background perspective to help color the seasonality factors that do tend to "inform" trading volumes and overall market direction under the surface.
What could drive stocks in the May to October period?
Interest rate, economic, and corporate profit conditions are the factors most likely to drive stock prices over the May through October period. And both the bears and bulls make compelling points to consider:
- Economic conditions continue to point to slowing growth
- Stubborn inflation
- Higher interest rates
- Narrow leadership among S&P 500 firms
- Strong consumer and business balance sheets appear equipped to handle the possibility of a recession
- Inflation pressures ebbing lower (albeit slowly)
- Fed is likely nearing the end of its rate hiking cycle
- Resiliency in consumer/labor trends
- Q1 profit growth, while negative, came in well ahead of lowered expectations
- The market may be looking ahead to the potential for better earnings trends in the back half of the year
In our view, both the bulls and bears have a good grasp on current conditions driving stock prices at the moment. In fact, we believe there aren't many points outside the ultra-bullish/bearish camps where both sides can't find common ground on the dynamics shaping the economy and markets. However, where the market forms are in the timing and degree of how those dynamics likely evolve — specifically, the role each plays in shaping forward stock prices over the coming months.
We believe investors are best served by taking a balanced view of current market conditions and avoiding timing mistakes that can weigh on longer-term investment success.
Themes for investors to watch
At some point, investors will begin to look through all the headlines, slowing growth, and interest rate/policy issues that challenged asset prices and created the highly uncertain environment we've all lived through over the last 12+ months.
In the meantime, more clarity is needed in the following areas before asset prices can find a more definitive direction:
1. A dimmer corporate profit picture
Notably, the themes that drove the Q1 2023 earnings season centered around consumer companies continuing to note pricing power, despite a broader moderation in consumer spending. Likewise, housing and autos were a bright spot, with pricing trends and demand holding firm in Q1. And for Tech (an essential driver in the S&P 500 Index), secular growth trends remain intact.
However, corporate commentary focused on slowing demand in cloud computing and digital transformation. And bank earnings, while mostly beating better than feared expectations, failed to ease investors anxiety regarding the stress across regionals. That said, S&P 500 companies, in the aggregate, pointed to "normalization trends" as opposed to a more aggressive slowdown in demand. In our view, cost-cutting and efficiency initiatives to help protect profit margins and simply better-than-expected results helped stock prices navigate the Q1 earnings season rather well.
Bottom line: Companies beating lowered earnings estimates has helped quell investors' worst fears regarding a more aggressive decline in business conditions and outlooks. For now, investors appear content with a profit narrative that points to it could have been worse as reason enough to hold stock prices near current levels.
2. Growing odds of U.S. recession amid tighter lending dynamics
From an economic perspective, soft landing scenarios include themes built around a strong labor market and resilient consumers. On the other hand, hard landing scenarios point to the magnitude of interest rate hikes over the last year, delayed effects from previous interest rate hikes, and a higher for longer policy stance from the Federal Reserve to crush inflation.
Unfortunately, we believe slower growth, stubborn inflation, and higher interest rates keep U.S. recession odds elevated over the next 6-12 months. As a result, fixed income and cash-like investments provide attractive opportunities to increase yield today. Also, investors may want to lean on income-producing, high-quality stocks and maintain a modestly defensive/diversified tactical approach throughout the portfolio.
3. A looming Washington showdown over the debt ceiling
The U.S. federal government has once again reached its debt ceiling, which is a self-imposed legal limit on the amount of debt that can be issued by the federal government. While we believe the odds of a default are very remote, markets are becoming increasingly concerned that the political brinkmanship that often accompanies lifting the debt ceiling could spill over past the June 1 deadline. That’s the date the U.S. Treasury Department has said it could exhaust its current use of extraordinary measures to pay obligations on government bonds and Social Security, for instance. While the date remains a moving target, it would be unwise for elected government officials to test the date on which the U.S. could potentially default on its obligations.
Bottom line: Markets usually tolerate the unnecessary political theater around differing opinions/ideologies on debt and spending issues when the debt ceiling arises because it always ends the same way. The debt ceiling is raised/extended regardless — every time. Seventy-eight separate times since 1960, to be exact, according to the U.S. Treasury Department. And while that is very likely to be the case this time around, the added drama amplifies the anxiety due to other ongoing uncertainties currently weighing down investor sentiment. Not to mention, the closer Congress moves to the expected date of a government default without a deal, the higher the chances for a misstep.
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