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Summer Stock Rally or Sell-Off? Debunking the Sell in May Myth

  • user  Investment.Sensei
    Investment.Sensei  Investment.Sensei

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The old Wall Street saying "Sell in May and go away" suggests exiting stocks for the summer months
However, data shows the S&P 500 has averaged positive returns from May-October, especially recently
This year's April pullback is typical before summer stock rallies in election years
Rather than selling, analysts recommend staying invested to capture potential summer rallies

Don't Sell in May This Year - Summer Stock Rallies Ahead?


For decades, the "Sell in May and go away" strategy has loomed over Wall Street. The classic stock market adage warns investors to exit equity positions at the start of May and remain on the sidelines until November to avoid the historically weaker summer months. But does this long-standing piece of trading wisdom still hold water? An increasing number of analysts argue it's an outdated relic that defies recent market trends.


As the May summer stretch approaches, market strategists are advising investors to go against the grain of the "Sell in May" gospel. The data backing up this counterintuitive stance is quite compelling when you dig into it.


Positive Summer Returns, Especially Recently


LPL Financial chief strategist Adam Turnquist recently reviewed the average returns for the S&P 500 index during the May through October period all the way back to 1950. His analysis revealed that contrary to the "go away" mantra, stocks have actually produced positive returns over these six months, averaging a 1.7% gain.


But it's the more recent years that are even more bullish for the summer stock rallies. Over the last decade from 2014-2023, the S&P 500's average return from May through October jumps to an impressive 4%. As Turnquist summed it up, "If investors do not intend to put the money in another channel that is expected to yield a better return in these months, they have no reason to take the investments out of Wall Street."


Even looking at just the month of May itself, stocks have tended to perform quite well historically. In 9 out of the last 10 years, the S&P 500 recorded a positive return in May with an average gain of 0.7%. The only outlier was 2019 when stocks fell 6.6% that May, but they came roaring back with a 4.5% jump the following year.


April Pullbacks Bullish Signal


This year's April selloff, which saw the S&P 500 fall 4.2% and snap a 5-month win streak, should not be cause for concern according to the analysts. Quite the opposite - LPL's data shows that when a multi-month rally is interrupted by a monthly decline, stocks have gone on to significantly outperform over the next year.


The firm analyzed 8 cases of a pullback interrupting a streak of at least 5 straight monthly gains since 1999. One year after each instance, the S&P 500 logged double-digit percentage returns like 28.1% and 10.3%. LPL's theory is that these pullbacks allow markets to reset valuations, shaking out weaker stocks and setting the stage for renewed upside in the higher-quality names.


Election Year "Summer Rally" Potential


Another key factor that could play out in stocks' favor through October is the investment cycle surrounding U.S. election years. According to research from Carson Group, summer months have historically produced solid gains in election years as a prelude to even stronger "year-end rallies."


The data shows that in election years dating back to 1950, stocks have averaged a return of 2.3% or higher from May through October an impressive 78% of the time. With the 2024 presidential vote on the horizon, conditions could be ripe for the often-seen "summer rally" to materialize in the coming months.


Investment Takeaway


While the "Sell in May" mentality may have made sense for investors decades ago, more recent market data tells a very different story. With surprisingly strong returns in the summer over the last 10 years, a bullish track record of gains following pullbacks like April's slide, and the potential for an election year "summer rally", analysts have a strong case for staying invested rather than heeding the old "go away" warning this year.


Of course, adverse events like further banking turmoil or escalating economic risks could always alter the landscape. But based on the historical tendencies laid out by firms like LPL Financial and Carson Group, investors may be well-served by riding out any near-term volatility and allowing their stock portfolios to capitalize on the market's typical seasonal strength through October.


Capitalize on Potential Summer Stock Rallies with Strategic Investing


For those looking to take advantage of potential summer stock rallies, maintaining a well-diversified equity portfolio with exposure to sectors and stocks positioned to outperform could pay off handsomely. Tech stocks and cyclical sectors like consumer discretionary and industrials have tended to lead the market higher during periods of economic expansion.


In addition, using dollar-cost averaging by investing set amounts at regular intervals can help smooth out volatility and capitalize on dips. Low-cost index funds and ETFs provide an easy way to gain broad market exposure without the excessive fees of active management.


For more tactical investors, monitoring market momentum and relative strength can help identify stocks and sectors showing strong uptrends to overweight. Companies with strong earnings growth, pricing power, and healthy cash flows make ideal "summer rally" candidates.


No matter the specific approach, the key is having a disciplined investing strategy and avoiding the emotional pitfalls of selling into market weakness at the wrong time. With history as a guide, patient investors who resist the "Sell in May" urge could be rewarded with impressive returns by staying invested through the summer months.


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Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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