The S&P 500 has marked its strongest performance for the month of May since 1990, closing with a 6% gain. This rise contradicts the long-held market adage, “sell in May and go away,” which has historically advised investors to retreat from the stock market during the summer months. Coined by Yale Hirsch of the Stock Trader’s Almanac in 1950, this expression was based on observations that the performance of Wall Street in the first half of the year typically outpaced that of the second half. Indeed, analysis by Saxo Bank indicates that since 1950, the S&P 500 has averaged a 7% return in the six months leading to April, while returns in the latter half of the year have languished at just 1.8%.
This year’s significant rise in May has reignited discussions about market patterns and investor behavior. Historically, the notion of adopting a cautious approach to investing during the warmer months tended to hold weight, especially for the United States. The broader implications of this seasonality extend across global markets, as evidenced by the UK’s FTSE All-Share index, which experienced a more modest increase of 3.5% in May, yet still recorded an overall gain of 5.5% for the year.
As experts seek to explain the unusual strength of markets this May, many point to the dynamics surrounding corporate earnings cycles. By late spring, companies have typically released their annual results, alongside guidance for the current fiscal year, which is generally positive. Such transparency lends itself to bolstered investor confidence that sustains market momentum. The forthcoming fiscal year can often seem too distant to influence current valuations; hence, prices stabilize. However, as forecasting pivots to encompass the next calendar year, corresponding expectations related to corporate earnings begin to permeate investor sentiment, often triggering price appreciation as markets anticipate performance uplift.
Unforeseen external events can disrupt established patterns. For instance, the recent bout of volatility—stemming in part from concerns about economic policies—has complicated the traditional investment landscape. The past year has seen sporadic market fluctuations in response to geopolitical developments and monetary policy decisions. Specifically, the S&P 500 experienced a downturn, declining 2.4% from October to May, with a 5% drop in the first four months largely attributed to investor anxiety surrounding intensifying tariff disputes during the Trump administration. This prior weakness set the stage for a market catch-up in May, though the sustainability of this upward trajectory remains uncertain.
The gains observed in May this year follow a similar trend from the previous year when the S&P 500 climbed 4% despite an earlier increase of nearly 20% in preceding months. The context of a down year in 2022 ultimately led to a rebound in the first ten months of 2023, driven by a resurgence in earnings growth and increasing investor confidence.
While the latest performance might signal ongoing strength, analysts caution against complacency. Markets that have repeatedly showcased robust gains often find themselves susceptible to corrections. Historically, May has indeed been a month of volatility, but this is interconnected with broader narrative misconceptions about market risks, particularly around October—a month synonymous with significant historical market crashes in 1929 and 1987.
In the fallout of the market crash of 1929, for instance, a prolonged rally occurred throughout 1927 and 1928, culminating in a 24% surge leading up to the September peak, which ultimately unraveled. Similarly, the crash in October 1987, after a rapid ascent of 50%, serves as a stark reminder of the perils inherent in heightened market valuations. Notably, while both incidents serve as cautionary tales, October has also been marked by recoveries, reversing downturns in at least ten bear markets according to the Stock Trader’s Almanac.
Statistical insights reveal that September typically emerges as the weakest month for stock market performance, averaging declines since 1950. However, this average disguises a spectrum of outcomes, which can muddy the investment waters for retail investors as they navigate market sentiment.
Market volatility is often misconstrued as a deterrent to long-term investment success. Despite frequent fluctuations—highlighted by the MSCI World index’s decline of over 10% in 30 of the past 53 years—financial professionals suggest that the prudent response to such volatility lies in calmness and adherence to established investment strategies. Duncan Lamont of Schroders emphasizes the need for investors to maintain focus and avoid being overwhelmed by short-term turbulence, which might undermine long-term financial goals.
Emerging trends indicate that younger retail investors in the United States exhibit resilience against market volatility, with an inclination towards “buying the dip.” This sentiment is increasingly prevalent among younger demographics who perceive equities as a long-term investment vehicle. Strategist Ed Yardeni notes that this mindset could be beneficial in the long run, positing that external shocks, such as a potential debt crisis, could serve as a mechanism for political accountability, though investor sentiment could also shift drastically based on prevailing market conditions.
As the market continues to navigate through this complex interplay of seasonal patterns, external events, and trader psychology, the evolving narrative remains pivotal for stakeholders across the financial spectrum.