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Sell in May? Not So Fast

Sell in May? Not So Fast

“Sell in May and go away” is a well-known adage in stock investing. Although we’re entering a season that traditionally has ushered in weakness for stocks, Schwab experts caution against trying to trade around the phenomenon.

“First, you would have to get two decisions right—the sell and the buy—which is extremely difficult,” says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. “Second, there have been multiple time periods during which the S&P 500 Index has shown good returns during the summer months.” 

After some weakness in March and early April, U.S. stock indexes recently have again traded at or near record highs. Economic growth concerns appear to have faded in recent weeks, and investors may be becoming more accustomed to the unique way President Donald Trump’s administration has approached issues. Markets used to move noticeably on a presidential tweet or off-the-cuff remark, but investors have increasingly tuned out the noise, Liz Ann says. 

“A case in point—the president mentioned in an interview with Bloomberg News on May 1 that he might look into breaking up big banks, yet the stocks shrugged off the comments and banks finished the day roughly where they were before the comments were made,” Liz Ann says.

Past performance is no guarantee of future results, Liz Ann notes. That said, “it’s possible we are hitting a sweet spot for equities—where economic growth is good but not overheated, corporate profits are strong, inflation is tame, global political risks are fading, and fiscal tailwinds are developing,” she says. “It doesn’t mean we won’t see pullbacks, of course.”

U.S. economy chugs along

Although first-quarter real gross domestic product (GDP) growth was relatively weak at 0.7% annualized, Liz Ann believes that reading may understate the longer-term growth rate.

“Recently we’ve seen some signs of the economy perking up since the first quarter’s soft patch, although there are still some areas of concern,” she says.

After falling a bit in the previous month, the Institute for Supply Management’s (ISM) services index recently rose again to 57.5, while the forward-looking new orders component jumped back to 63.2. And while the ISM manufacturing index fell modestly to 54.8, it still remains well above the 50 mark that separates expansion and contraction. 

Meanwhile jobless claims, a forward-looking indicator, have remained historically low, while employers added another 211,000 jobs in April, rebounding from a soft March reading, according to the Bureau of Labor Statistics. And the unemployment rate fell to a decade low level of 4.4%, with the underlying drivers suggesting it can go lower still. 

Fed may hike rates in June

The Federal Reserve policymaking meeting came and went in May with no action, but the accompanying statement was seen as relatively hawkish—noting that first quarter weakness was likely “transitory.” Odds that policymakers might increase the target federal funds rate, a key short-term interest rate,  at the Fed’s June meeting rose to nearly 100% right after the statement release, up from about 70% right before the meeting. Historically, the Fed has raised short-term interest rates to “tap the brakes” on growth and prevent the economy from overheating.

Hope for swift action by politicians in Washington, however, is waning. With Congress still embroiled in the effort to repeal and replace the Affordable Care Act, action on tax reform may not occur until late this year or even into 2018. But a spending bill was passed that ensures the U.S. government will continue running for the next several months, removing at least one near-term concern for the market. 

Chinese growth may be slowing

Another potential concern for the market is coming from overseas in the form of a potential Chinese slowdown, according to Schwab Chief Global Investment Strategist Jeff Kleintop. China’s purchasing managers’ index and industrial commodity prices recently have declined.

“If a one- or two-month decline in these indicators leads to a more prolonged slowdown, the global economy may become more vulnerable to a policy mistake or developing crisis, and stocks may suffer a pullback,” Jeff says. 

Even without a potential global catalyst for a global stock market pullback, a lingering slowdown in China’s pace of growth, combined with a slump in commodity prices, could mean an intermission in the performance of emerging market stocks after blockbuster gains of more than 20% over the past 12 months, Jeff says.

What should investors do?

Subscribing to the “sell in May” theory has not always been financially rewarding, so Liz Ann suggests caution about trying to trade around any likely volatility. The U.S. economy is growing but not too fast, earnings have accelerated sharply, and fiscal tailwinds are still blowing. There is the potential for a retrenchment in the gains in emerging market stocks in the near term, but sticking with a diversified portfolio is important. Pullbacks are possible, but it’s important to stay focused on fundamentals and your long-term goals.

What you can do next

  • Don’t try to time the market—it’s time in the market that counts. Want to talk about your portfolio? Call our investment professionals at 800-355-2162.
  • Watch Schwab experts discuss other market and economic topics in the Schwab Market Snapshot.
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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Investing involves risk including loss of principal. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.  Investing in emerging markets may accentuate these risks.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. 

Diversification strategies do not ensure a profit and do not protect against losses in declining markets. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

The S&P 500® Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation. 

The Institute for Supply Management (ISM) Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.

The Institute for Supply Management (ISM) Non-manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms by the Institute of Supply Management. The ISM Non-manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.


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