(IBD) Some investors think it's smart to dump stocks in May — as the following six months are usually the weakest for the S&P 500. But that kind of "sell in May and go away" thinking is costing you money.
May is known as the beginning of the end for annual S&P 500 gain. But recently, it hasn't been a bad month for the S&P 500 at all. Powered by big May gains on average in the past five year by consumer discretionary stocks like Caesars Entertainment (CZR) and Penn National Gaming (PENN) and tech titan Nvidia (NVDA), May is a fine month for S&P 500 stocks.
The S&P 500 actually rose four of the past five months of May, by an average of 0.6%, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
And get this: The S&P 500 rose an average of 3.8% in the six months from May through October in the past 10 years, says Ryan Detrick, market strategist at LPL Financial. That blows up the idea it's best to bail out of the S&P 500 in May and stay out until October.
"Stocks are up more than 87% from the March lows, suggesting a well-deserved pullback during these troublesome months is quite possible," said Detrick. "But ... we'd use any weakness as an opportunity to add to positions."
May Isn't As Terrifying As It Might Seem
May and the five following months don't really deserve the amount of hate.
The S&P 500 actually wound up rising from May through October in eight out of the past 10 years, Detrick says. Specifically, the S&P 500 skyrocketed 12.3% from May 2020 through October of that year. Selling in May last year would have left you out of one of the S&P 500's most powerful runs in history.
And some gains in May are strong, too. Last May, investors already started positioning for a reopening of the economy and pushed the S&P 500 up 0.6%. That wasn't amazing. Investors, though, bet gambling would come back, pushing shares of Caesars and Penn National up 65.4% and 84.1%, respectively, last May.
May isn't typically the harbinger for a tough slog — especially following a powerful April like the one we just had, Detrick says. When the S&P 500 jumps more than 5% in April, like it did this year, the market usually gains another 6.2% on average in the following six months. That's well above the typical subpar 1.7% gain in the six months following May.
Just look at chipmaker, Nvidia. Shares jumped 21.5% just in May 2020. But anyone who sold then is bummed, as shares ended up gaining another 42% through the end of October.
But It's Wise To Temper S&P 500 Expectations
There's no question, though, historically the six months following May isn't the S&P 500's best. The typical 1.7% gain in the S&P 500 from May through October is the weakest of any six month period, Detrick says. The best? The 6.8% average gain from November through April.
So what is an S&P 500 investor to do who thinks May is the peak for now? It turns out that from May through October, consumer staples and health care S&P 500 sectors do the best, says Sam Stovall, strategist at CFRA. These sectors jumped 4.6%, on average, from May through October since 1990. Defensive sectors like these tend to do best in the six months starting in May as investors brace for S&P 500 volatility. He found these sectors beat the S&P 500 in seven of the past 10 year by a more than four-to-one margin.
"Sometimes it has paid to lock in gains ahead of the traditionally challenging May-through-October periods," Stovall said. "Yet, cashing out might not be the best option either."
