Market Trends in May: An Uncertain Outlook
As the saying goes, “Will stocks disappear in May?”—some investors are leaning towards a more cautious stance this year. Historically, the period from May to October marks a challenging six months for stock returns. With many traders taking summer breaks, this typically leads to reduced liquidity and heightened volatility, making drawdowns more likely. However, this year might defy the trend. Jeffrey Hirsch, editor of Stock Traders Almanac, questions whether this will be the year that traders don’t sell in May. “Let’s observe how the market performs,” he suggests.
There’s a sense that the next market move could be upward. The S&P 500 and Nasdaq Composite have reached record highs, even amid ongoing unrest in the Middle East. This resilience in the market suggests that the backdrop is broader than it appears. According to Hirsch, a key measure he follows—the Moving Average Convergence Divergence (MACD)—indicates there are still entry and exit points that support the current bullish trend.
Yet, investors are advised to remain alert. Recent GDP forecasts from the Atlanta Fed have softened, estimating a mere 1.2% U.S. growth for the first quarter, down from initial predictions exceeding 3%. There’s also an emerging concern about the impact of AI on employment, which remains poorly understood. Ultimately, much hinges on the geopolitical situation, particularly the tensions between the U.S. and Iran. If the Strait of Hormuz can be reopened and a lasting peace is established, it might ease fears of an economic downturn, especially as consumers are already tightening their belts with gas prices climbing over $4 a gallon.
“A lasting solution in Iran could bolster market confidence,” Hirsch notes. “If we navigate May to October effectively, the market could rise.” However, he also cautions that if negative trends emerge, particularly in the MACD signals, it might be prudent to scale back investments. Historically, the period from May to October, especially in a midterm election year, hasn’t been promising. Data since 1945 shows the S&P 500 has only gained about 2% during this half of the year, with an average decline of 1.2% during midterm years.
Interestingly, Paul Sciana from Bank of America Securities points out that upcoming reviews in June might challenge the “sell-in-May” narrative this time around. Notably, short-term trading trends signal potential opportunities in May, with selling in July or August followed by a downturn anticipated from August to October. For now, Hirsch favors investments in the iShares 0-3 Month Treasury ETF (SGOV) and the iShares Trust iShares 0-1 Year Treasury ETF (SHV), along with iShares Core US Aggregate Bond ETF (AGG). “It’s not about completely exiting the market, but rather about reassessing positions,” he concludes.
