Sell in May and Go Away?
Buckle up, as the trigger points for one of the most well-known investment axioms, “sell in May and go away,” is nearly here. This gets a ton of play in the media, as the six months starting in May are indeed the worst six consecutive months on the calendar historically (going back to 1950). The S&P 500 has averaged only 1.7% over those six months and moved higher less than 65% of the time.
- Stocks bounced back after a three-week losing streak, but worries remain high.
- Get ready to hear a lot about the worst six months of the year, also known as the “sell in May” period.
- The good news is stocks have done just fine in this period lately, especially in election years.
- While the GDP number for the first quarter disappointed, strength was evident beneath the surface.
- The weakest numbers were in areas that are volatile and tend to reverse, such as inventories and net exports.
- The core numbers were solid again and didn’t change our basic outlook for the rest of the year.
Now let’s be clear. Up 1.7% might not sound like much, but it is still an increase. Also, we do not advocate blindly selling due to the calendar. But it is worth being aware of this calendar effect, as you will hear a lot about it this week.
Now here’s something that might be less well known. These “worst six months” have gained in eight of the last 10 years.
Not to mention election years tend to see a summer rally and strength during these six months, with the May through October period up 2.3% and higher an impressive 77.8% of the time.
Lastly, how the market is doing going into these six months matters. Some of the worst “sell in May” periods have taken place when stocks were down before May began, whereas if stocks were positive, the following months improved. In fact, when the S&P 500 was up more than 4% for the year as of the end of April, as it likely will be this year, the following six months gained 4.2% on average and were higher nearly 78% of the time.
We wouldn’t be surprised if stocks consolidated for another month or so, working off some of the historic rebound off the late-October lows. We do not expect major weakness, but a break makes sense. However, since this is an election year and stocks have been strong so far this year, we think a summer rally and strength during these six months is likely.
The Headline GDP Number Masks a Strong Economy
The economy grew 1.6% in the first quarter, after adjusting for inflation. This was well below expectations for a 2.5% increase and significantly below the 3.4% increase in the last quarter of 2024. It also ended a streak of growth above 2% for six consecutive quarters. So, what happened? Is growth slowing down, and should we worry?
Simply put, no.
As with all macroeconomic data, it’s helpful to look under the hood. A closer look at GDP data reveals five major components:
- Household consumption
- Investment — nonresidential and residential
- Government spending
- Change in private inventories
- Net exports (exports minus imports)
The last two — private inventories and net exports — tend to be the most volatile segments of GDP growth. Excluding these categories provides a much clearer picture of actual spending and production in the economy, i.e., final demand after adjusting for inflation. Think of it like core GDP. Real final demand rose at an annualized pace of 2.8% in the first quarter, well above the 2010-2019 average pace of 2.4%.
In fact, government spending eased in the first quarter as federal nondefense spending fell and state/local government investment pulled back. Excluding government spending from final demand, real private final demand rose 3.1% in the first quarter. That’s strong, no two ways about it. In fact, while last quarter’s GDP number is a lagging indicator, the most useful part of the report in terms of looking ahead is final demand. Right now, there’s little indication that it’s slowing.
The table below shows a breakdown of GDP growth by the major groups mentioned above. Some highlights:
- Consumption eased, but mostly because households purchased fewer vehicles and less gasoline in real terms.
- Services spending accelerated at the fastest pace since the third quarter of 2021 when it was fueled by the pandemic recovery.
- Investment spending picked up, with tech and industrial equipment spending accelerating.
- Residential investment (housing activity) added the most to GDP growth since the fourth quarter of 2020.
It’s clear how the change in inventories and net exports were a significant drag, pulling GDP growth lower by 1.21% when combined. Net exports were driven down by a surge in imports, as U.S. households and businesses bought more from abroad than they did in the fourth quarter of 2023.
Here’s the Big Picture
As noted above, economic growth remains strong when factoring in the most important parts of the economy: household consumption, investment, and even government spending. What’s amazing is the economy has grown at a faster pace than the Congressional Budget Office (CBO) forecasted in January 2020. After adjusting for inflation, the economy is almost 1% larger than the CBO projected. That’s despite 1) a worldwide pandemic and 2) the most aggressive rate-hike cycle by the Federal Reserve in 40-plus years.
Of course, a strong economy means inflationary pressures are greater. The first quarter showed some evidence of that, which indicates interest rates are likely to stay higher for longer. Stronger economic growth plus more inflationary pressure means the economy is growing quite rapidly in nominal terms (before adjusting for inflation). That’s important because nominal GDP growth is ultimately where profits originate. Nominal GDP growth rose at an annualized pace of 4.8% in the first quarter, much faster than the pre-pandemic trend of 4.0%. The underlying numbers point to a continuation of this above-trend pace. That’s positive for profit growth, which is ultimately what matters for markets over the long run and an important factor as to why we continue to favor stocks over bonds.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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