You have probably heard a version of this popular trading aphorism. The verbose version that I learned is “Sell in May, don’t come back til Labor Day.” Like most popular proverbs, this one was rooted in historical logic from the Stock Trader’s Almanac. The problem is that today’s investors don’t remember that the affirming data set originated from the Dow Jones Industrial Average. The Dow is only 30 stocks, and the index today contains names that are much different than 1986 when it was first published (Apple for one).
May 2024 presents additional factors to consider before following a 3-decade old timing strategy. It is an election year and there are no “normal” national elections anymore. The Federal Reserve may very well begin cutting rates this summer. From the rate hikes that ended in May 1974 through the pre-GFC cycle that ended in June 2006, the Fed rarely waits more than a year before cuts start. In the nine rate cut instances since 1974, The Fed started cutting in the summer months (June or July).
We don’t want to confuse correlation and causation, but this month’s surprisingly poor jobs report is providing confirmation that the economy may need lower rates to prevent an economic downturn.
We review these seasonal, economic, and societal trends to discern where the risks and opportunities may be. When asked, Federal Reserve Chair, Jerome Powell said that a rate hike is not likely so the risk that rates move higher from here is not a pragmatic concern. The broad stock market produced mixed results from earnings trends. Consumer stocks are reporting poor earnings and hinting that matters could get worse. Starbucks and McDonald’s operate 78,000 stores in one hundred countries. These two companies have real-time daily knowledge of what consumers are willing to spend money on.
Lower rates will benefit bond investors who locked into high rates and longer maturities instead of sitting in short-term cash investments. In anticipation of lower rates bond yields have already started moving lower. Investors who are holding excess cash will need to be comfortable investing in stocks if they wait until after the Fed starts cutting rates.
Aside from your investment dollars, you will benefit from rate cuts if you owe money on an adjustable-rate mortgage. Most HELOC rates are north of 8% but they probably won’t be that high at year-end.
Will ‘sell in May” work this year? Probably not if you wait until October to get “back in” There are too many opportunities right now for stock and bond investors to spend the summer in even if markets are a bit bumpy.
