The selling mostly continued on the first trading day of May. The Dow was off about 150 points in late afternoon trading Monday, or 0.4%. The S&P 500 also was down 0.4% while the Nasdaq was up slightly.
There is an old Wall Street adage that many investors “sell in May and go away.” It’s a pithy reference to the theory that bullish traders take a break during the summer and early autumn months and that stocks will typically fall until just before the winter holidays.
Investors already have gone away … and might now come back
But there’s another pithy saying among traders: “Stocks climb a wall of worry.” Markets often rally in troubling times, partly because investors are looking ahead to a rosier future when all those fears diminish.
So is the worst for stocks still yet to come, or is the market finally close to bottoming? Some strategists see reasons for optimism.
“The markets are likely giving too little credence to supply chain progress, anti-inflationary policy moves and energy market resilience — all of which appear to be moving in the right direction and could improve sentiment and valuation in due course,” Robert Teeter, managing director of Silvercrest Asset Management, said in a note Monday.
Teeter added that the jobs market remains healthy and that earnings reports for the first quarter have mostly been “respectable” despite “several prominent stumbles,” mainly in tech.
“With much of the bad news out in the open and the prospect of better news in store, investors may be prudent to extend their time horizon as problem-solving takes hold,” Teeter added.
Stagflation worries persist, but so far, it’s all ‘flation’ and no ‘stag’
American consumers aren’t showing signs of being too worried just yet.
“After two years of Covid restrictions, people want to get out and have the means to do it. Household cash has exceeded debt for the first time in three decades,” said Linda Duessel, senior equity strategist with Federated Hermes, in a report last week.
“Corporate America is in great shape, too,” she added. “Profits and cash flow are at record highs. Profit margins are at or near record highs. S&P 500 earnings estimates keep rising. And corporate balance sheets are flush with cash.”
There are legitimate reasons to be worried that the combination of rising interest rates and higher oil prices could eventually lead to a recession or stagflation, the combination of slow growth and surging consumer prices. But we don’t appear to be there yet, which is good for investors.
It’s a quaint idea to think that stocks should stumble in the summer because traders are supposedly hopping on the Jitney to the Hamptons and throwing their phones in the Atlantic Ocean. But last year, the S&P rose 10% between the start of May and the end of October.
According to data compiled last year by LPL Financial, the S&P 500 has averaged a 5.7% gain between May and October over the past decade. The only time the market fell in that period was in 2015.
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