INSUBCONTINENT EXCLUSIVE:
NEW YORK: "Sell in May and go away," arguably the most well-worn axiom on Wall Street, has proven to be shrewd advice during previous
midterm election years.
Though the exact origins of the phrase are a bit murky, up until recently, stocks had underperformed in the
six-month period starting in May, which coincides with vacation for many traders between the Memorial Day and Labor Day holidays.
But this
year, investors may be better served by eschewing the adage as stocks look positioned to buck that trend, with corporate profits coming off
a banner quarter and as the U.S
economy continues to gain traction.
According to the Stock Trader's Almanac, the Dow Jones Industrial Average has lost 64.71 points from May
through October since 1950 versus a gain of 20,790.89 for the November through April months
Over the same time frame, the SP has gained 264.31 points during the May-October period, compared with a gain of 2,420.72 points during the
other six months.
While stocks have risen in the November through April period, volatility has also increased
After hitting a record high on Jan
26, the SP dropped more than 10 percent to bottom out on Feb
8 at 2,581 and tested the low again in late March
The index now sits about 5.5 percent below the January high.
"I don't think it is going to work this year," said David Joy, chief market
strategist at Ameriprise Financial in Boston.
"The economy is strong, earnings are good, the market has already sold off a little bit."
This
year, May is off to a strong start, with both the Dow and SP on track for their best performance in the month since 2009.
Midterm years have
proven to be particularly troublesome, however, according to data from LPL Research.
Elections for the U.S
House of Representatives and Senate are set to take place in November
Historically, the party in power loses seats after a new president's election and the Republican party currently holds a majority in both
the Senate and House of Representatives.
Since 1950, midterm years have only yielded an average gain of 0.1 percent on the SP in the May
through October period, with the index also suffering an average peak-to-trough pullback of 14.7 percent, the largest of the four years in
the cycle.
"Clearly midterm elections are a headwind and a concern but there are others as well," said Terry Sandven, senior equity
Bank Wealth Management in Minneapolis.
"The difficulty of investing is on the rise, that is largely a factor of inflationary pressures
becoming more prevalent and interest rates on the cusp of a regime change."
Yields on the benchmark 10-year U.S
Treasury note
touched a high of 3.128 percent on Friday, their highest level since July 2011 and many analysts expect them to climb towards
3.25 percent.
As for selling in May, the last time the month was negative for both the Dow and the SP was 2012
In the five years since, the SP has climbed in the May through October period four times, with the only decline being a 0.3 percent dip in
2015.
Another reason for optimism this year, according to LPL, has been the performance of the SP 500 over the prior six months and its
position relative to the index's 200-day moving average, a technical indicator.
Since 1950, when the SP has entered the "sell in May" period
above its 200-day moving average after notching gains in the prior six months, the benchmark index has climbed about 3.3 percent, with gains
70.2 percent of the time.
Perhaps even more telling for stocks is during midterm years; the SP has climbed an average of 5.5 percent, with
gains about two-thirds of the time when those conditions are met.
For 2017-2018, the SP rose 2.8 percent in the November though April period
while closing out the period nearly 40 points above its 200-day moving average.
"That is not even getting into the positive fundamental
backdrop that is still in place with the corporate earnings strong, the overall fiscal policy which is still tax reform and potential
infrastructure spending and deregulation," said Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina.
"In
these next six months we would be buyers of any weakness and wouldn't be shocked at all if we bucked the 'sell in May and go away' trend for
the sixth year out of the last seven."
