Sell in May and Go Away? Some Stock Data on Midterm Years
There’s a famous expression in finance…
“Sell in May and go away.”
That’s because, historically, the month of June is rough for stocks.
It seems this expression is especially true for the month of June during American mid-term election years…
Below is a chart showing the average monthly returns of the S&P 500 (a broad index of the American stock market) during a midterm year:
The blue bar represents the average monthly return, while the green dot represents how often returns are above that average.
As you can see, in June, the average monthly gain is -1.8%... and 61.1% of the time, the market’s returns are worse than that.
So what does that tell us, since July tends to be a positive month?
Should we sell our stocks and wait it out a month?
In my opinion, no.
My Contrarian Take:
To me, the chart above says June might be a good month to buy on dips and average down costs on the stocks I own.
This chart comes from a new report by LPL Research, which put together a number of statistics involving historical market activity to help investors guide their decisions, since election years tend to be volatile for American markets.
To briefly explain: the U.S. has an election every two years.
This year, in 2022, all eyes are on the House of Representatives, which is expected to change parties from Democrat to Republican.
The differences in brief: Democratic policies tend to involve taxing and spending on large national public services, while Republicans prefer to cut taxes and let individuals and businesses and individual states decide how to spend their money.
Historically, markets tend to perform better when Democrats hold all three elected offices, since the government spends a lot of money in a way that benefits consumers and businesses.
Markets have also performed well when Democrats and Republicans control different elected offices, since this typically fosters more compromise and slows down any drastic changes that could impact the market.
This is going to be a developing story and I will keep you abreast in future updates…
However, I should also share with you the fact that many institutional investors are becoming more positive about the markets going into the summer.
See, the S&P 500 just ended a 7-week losing streak.
There have only been three times in history that the market went down that many weeks in a row…
Two of those times were the high inflation periods of 1970 and 1980. How did the market do? Up 33% over the next year, each time.
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That trend looked like it would have continued in 2001, if it weren’t for the World Trade Center attacks.
Another reason to be bullish on the market right now, despite concerns about a future recession?
The market very nearly entered a bear market in May. And it may continue in June.
But as I have been saying, the drawdown is not as severe or as worrisome as other corrections in the past.
Previous corrections over the last 42 years between -10% and -20% showed gains of nearly 25% on average a year later and nearly 40% two years later.
What Day Do Stocks Tend to Bottom?
As you can see in the chart above, market corrections have historically not persisted, and have created an extraordinary opportunity for gains for investors in the subsequent months.
Finally, LPL Research offers one other reason to be optimistic about the market:
The S&P 500 gained 6.6% in one week in late May. The size of this gain rarely ever happens, and it has historically indicated a reversal during a downturn or the market gaining in momentum.
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The average yearly gain following a weekly gain of 6% is 21.7%.
Listen…
Even though the first 6 months of 2022 have been rough for investors, I have remained optimistic.
Cautiously optimistic, but optimistic nonetheless.
As I’ve been saying for months now in these emails, separately from LPL’s research, my own research suggests that the future returns of the market might be lower than average.
This is mostly due to the market’s overvaluation as well as rising interest rates, in addition to the strong likelihood of a recession in the near future.
But I mostly perceive these as potential opportunities rather than threats.
Why?
Let me explain…
You’re a Contrarian Investor Too (You Just Don’t Know it Yet)
If you look at all the best times to invest in stocks over the last 72 years…
They all coincided WITH recessions and massive drawdowns:
Literally find every point on the chart where you wish you could have bought into the markets to maximize your gains.
Every single instance coincided with a recession.
Even during decade-long periods when the stock market went sideways…
Buying on the dips caused by recessions would have allowed investors to capture a huge profit over time.
Of course, a resurgence in the stock market would certainly help us build our wealth over time…
But judging by what we know about June’s historical performance, it might be better to avoid investing in anything super new, buy stocks that have declined to lower your average costs, and collect dividends.
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