OPINION: Sell in May and Go Away?

A picture of Craig Fehr Edward Jones Principal

The old market adage “sell in May and go away” may have a ring to it, but is it valid advice? Unsurprisingly, the answer is no.

First, rhymes are not a reliable basis for portfolio decisions. Second, while vacation season is approaching, disciplined investing is a year-round event.

Although the saying relates to the (antiquated) notion that the stock market is weaker during the summer, we don’t think seasonal portfolio changes are sensible. Nevertheless, as we turn the calendar to May, recent market moves and historical perspective are informative, offering some additional information on the outlook this year.

May is not a cause for mayday

The summer brings the shift toward travel and leisure, but the market doesn’t pack its bags, as the old phrase suggests. Over the last 40 years, the average return for the stock market from May to August was a respectable 3.2%, hardly a period worth missing.

The market was higher in 75% of those summer periods, with the best May through August gains coming in 1987 (+16%), 2009 (+18%) and 2020 (+21%). The worst periods were in 1998 (-14%), 2002 (-14%) and 2010 (-11%).

In the last four decades, May has seen the stock market rise 71% of the time, with an average monthly return of 0.8%. In those years when the stock market rose in May, it went on to log a gain for the full summer 88% of the time, with an average return of 7.4%.

The bottom line: Historical market experience doesn’t support a “sell in May” or a “go away” strategy. Past summer-period declines were not simply seasonal declines, but instead were often part of larger phases of market weakness, as was the case in 2022.

While we don’t think the coast is completely clear, we do believe the bulk of the current bear market is behind us.

This summer could be hot and cold

We have maintained our view that the economy is likely to endure some form of a mild recession this year. Last week’s release of the latest U.S. GDP report confirmed that the economy is losing momentum, with GDP slowing to 1.1% in the first quarter, compared with 2.6% in the prior quarter and 3.2% in the quarter before that.

Looking under the hood, the news was mixed. Consumers continue to show resiliency, with household spending (the lion’s share of the economy) increasing at a healthy 3.7% rate last quarter, a notable acceleration from the previous period and well above the average of 1.7% over the prior four quarters.

Elsewhere, however, signs of a slowdown were more evident in the first quarter. Business investment declined materially, including a sharp drag from inventories, which aligns with recent manufacturing surveys and signals that companies are tightening their belts. Additionally, residential investment fell in the quarter, though there are signs of stabilization in the housing market, and mortgage rates have come off their peak.

Although the GDP report signals the economy is softening, we also think it confirms that it’s doing so gradually instead of sharply. Our expectation for a mild and shallow recession is supported by our view that the labor market is starting from a historically healthy position, which should enable consumers to navigate a recession in better shape. The latest data on initial jobless claims and job openings is consistent with our view that employment conditions are weakening, but moderately.

Corporate earnings announcements were in the spotlight, with markets getting a boost from better-than-feared results. With roughly half of the S&P 500 companies having reported quarterly results, earnings for the period are down 1.7%, while revenues are up 4% versus the same quarter a year ago. In our view, this highlights that there is an encouraging level of ongoing demand, but profits remain under pressure from higher expenses (particularly labor costs).

The bottom line: While we don’t think market performance is governed by the calendar, we do think emerging evidence of an economic slowdown, along with downward revisions to forward corporate earnings estimates, will be a source of indigestion for markets in the coming months.

We think the stock market priced in a good portion of a mild recession in 2022’s 25% January-to-October decline. While that won’t prevent the market from experiencing bouts of anxiety as recessionary evidence mounts, we don’t think it will require a round trip back to the October lows.

In fact, we think the markets will—at some point this year—start to focus more on the eventual recovery, supporting the foundation for a more durable rebound in equities.

A good start is a good sign

Stocks added to 2023’s gains last week, including a 2% rally on Thursday, the best day since Jan. 6. Markets have logged a healthy rally so far this year, including the following year-to-date:

  • The S&P 500 is up 8%.
  • The Nasdaq has seen the strongest momentum, up 16%, as technology and growth stocks have rallied on the back of lower rates.
  • Global markets have also rallied, with international developed-market equities up 11%.
  • Bonds have also participated in the rebound, returning 3%, as yields have pulled back from last year’s peak.

Since 1982, when the stock market was higher in the year heading into May, it went on to post a full-year gain 89% of the time, averaging an annual return of 12%. The only years in which the market was higher from January to April, but then finished lower, were 1987, 2011 and 2015.

There were eight years in which the year-to-date increase heading into May was in the 6.5%-9.5% range, comparable to 2023’s 8% year-to-date gain. In those instances, the stock market went on to post an average full-year increase of 11.7%.

From a volatility standpoint (as measured by the CBOE Volatility Index), average market fluctuations historically have not been materially different in the May-through-August time frame versus the full year. However, stock moves have been particularly docile in recent weeks, with nearly one-third of the trading days in April seeing a daily move of less than 0.1% in the S&P 500. All but six days in April saw daily moves of less than 0.5%, and there have been just two days in the last six weeks in which the market has declined by more than 1% in a day, despite the ongoing turmoil in the banking system during that time.

The bottom line: Healthy gains heading into May historically have been a good signal of a positive year for stocks. We think there is a credible case for equity-market gains in 2023, but we doubt the path will be completely smooth.

We think the notable rally so far in 2023, while certainly welcome, may begin to show some fatigue. Recent gains have largely been spurred by emerging expectations (hopes) for Fed rate cuts later this year, along with consensus expectations for resilient corporate profits in 2023. We think both of those will prove to be slightly too optimistic, as we expect the Fed to hold rates steady for much or all of the second half of the year, as well as some moderate downward revisions to earnings estimates as profits reflect economic headwinds.

Debt-ceiling drama in Washington and geopolitical uncertainties will add to the list of short-term challenges. Investors should take some solace in the fact that markets are forward-looking. While these headwinds won’t be ignored, we think last year’s declines anticipated some of these risks. We think any upcoming pullbacks can be treated as buying opportunities in anticipation of a longer-term bull market.

Plan in May, so aligned to your long-term goals your portfolio can stay.


Craig Fehr is a principal and the leader of investment strategy for Edward Jones. Fehr is responsible for analyzing and interpreting economic trends and market conditions, along with constructing investment strategies and asset allocation guidance designed to help investors reach their financial goals. He has been featured in Barron’s, The Wall Street Journal, the Financial Times, SmartMoney magazine, MarketWatch, the Financial Post, Yahoo! Finance, Bloomberg News, Reuters, CNBC and Investment Executive TV. He holds a master’s degree in finance from Harvard University, an MBA with an emphasis in economics from Saint Louis University and a graduate certificate in economics from Harvard.

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