Linda S. Parenti, CFA
President & Chief Investment Strategist
April’s positive total return was a welcome break after two consecutive monthly declines for the S&P 500. Modest gains overall in equity prices have continued in May, once again pushing the index back into positive territory year-to-date.
Volatility has declined as well, which is also a welcome change from recent months. Yet, with questions rising regarding trade issues, inflation, interest rates and geopolitical tensions, equity investors might be asking themselves if they should follow the old adage to “sell in May and go away.” Historically, there is nothing particularly risky about May. In fact, over the past three years, the month has delivered strong performance for the S&P 500. The saying comes from the increased probability of seeing positive, but lower returns for the six-month period of May through October versus the following six-month period of November through April. Since both periods generate positive results on average, it is more sensible to simply remain invested year-round.
Even if the historical averages are positive, as investors we all know that stock market declines do occur as we saw in February and March. There are also times when full year equity returns are low or negative. The market’s latest patterns would be more worrisome if reports on the economy started to falter. However, monthly data continues to show strength, especially in key areas such as employment, housing and business sentiment. Currently, equities are taking a breather with the price level of the S&P 500 moving sideways. Yet, companies in the index are reporting very strong sales and earnings growth. The combination of static prices and higher earnings has brought valuations down to more reasonable levels. With economic momentum supportive of positive forward earnings, this allows room for prices to resume an upward trend in future months.
May’s saying makes a nice rhyme that is easy to remember, but that does not make it a sound investment strategy for determining your exposure to stocks, nor are panicked shifts out of equities during periods of heightened volatility. So how do you know if you have too little or too much exposure to stocks? Your risk tolerance is a very important factor. Still, your allocation to equities is best determined by your time horizon and cash flow needs. Being sure you have an up-to-date financial plan is the chief way to confirm that your asset allocations are appropriate, regardless of the time of year.