Sell In May And Go Away?

Monday marks the beginning of May. It also marks the beginning of a six-month period that has historically delivered lackluster market returns.

Sell In May

Every year at around this time, the old Wall Street adage “sell in May and go away” pops up once again. While it may seem comically over-simplistic, there is actually plenty of historical evidence to support the sell in May trade. Since 1950, the Dow Jones Industrial Average has generated an average annual return of only 0.3 percent during the six-month stretch from May through October. At the same time, the Dow has averaged a 7.5 percent gain from the months of November through April.

Reasons To Sell

Adage aside, there are a number of fundamental reasons stock traders are tempted to sell this May. Three months into his presidency, Donald Trump has delivered very little of the meaningful legislation that investors hoped would drive earnings growth. Trump’s false start on healthcare reform has traders questioning his ability to deliver the tax cuts, corporate deregulation and infrastructure spending he promised throughout his campaign.

Trump’s unpredictability also has investors worried about geopolitical conflicts with Russia, North Korea and other nations. In addition, the S&P 500 is bumping up against all-time highs to close the month of April and could experience technical selling pressure in coming weeks.

Reasons Not To Sell

Still, there are plenty of reasons to be optimistic about the six-month outlook for stocks. Clearly, momentum in the stock market since early 2009 has been to the upside. Without a bearish catalyst, it will likely remain so. Of the first 95 S&P 500 companies to report first-quarter earnings in recent weeks, 68 percent beat consensus EPS estimates and 64 percent beat revenue estimates. Those numbers indicate the economy is still performing well for top U.S. companies. The U.S. Federal Reserve’s willingness to raise interest rates is also a signal of economic strength.

Overseas, preliminary French election results have eased fears of a collapse of the European Union. Despite U.S. oil prices dipping back below $50/bbl, OPEC seems committed to reigning in production in the near term.

Finally, perhaps the best reason not to sell in May is that the trade hasn’t worked in the past few years. Over the past four years, the S& 500 has averaged a 4.6 percent gain from May to October. From May 1 to November 1, 2016, the SPDR S&P 500 ETF Trust SPY was up 1.4 percent. Since last year’s sell in May trade ended, the SPY ETF is up 12.9 percent.

Joel Elconin contributed to this article.

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