Seasonal trends can be a drag on a stock market in need of a rebound

Traders operate on the floor of the New York Stock Exchange (NYSE) on April 25, 2022 in New York City.

Spencer Platt | Getty Images

Investors will be looking for a respite after the worst month for stocks in more than two years, but the calendar might not be too friendly from here on out.

Rising interest rates, some high-profile earnings misses and growing concerns about global growth took their toll on the stock market in April.

The big drop comes on the eve of a historically weak period for equities, with the “sell in May and leave” mentality officially kicking off next week. According to the Stock Traders Almanac, an investor who held the Dow Jones Industrial Average between November 1 and April 30 and then switched to fixed income for the next six months would now have achieved solid returns with reduced risk for more than seven decades.

According to Sam Stovall, chief investment strategist at CFRA, that seasonal weakness can be especially pronounced in the midterm election years.

“At times it has paid off to lock in gains ahead of the traditionally challenging May through October periods. And this is especially true of midterm election years, otherwise known as ‘sophomore slumps’. Indeed, since 1992, the S&P has been 500 fell 3.4% on average in the May-October midterm election years,” Stovall said in a note to customers on Monday.

However, it may not be the smartest move to jump into fixed income, as the simple strategy suggests.

Cashing out may not be the best option either, as equal exposure to consumer staples and health care from May to October outperformed the broader benchmark 100% of these years, delivering a six-month average total return of 5.6%, Stoval wrote.

Did the May sale come early?

Certainly, the defensive sectors that Stovall highlighted have already outperformed in recent weeks.

And what about the tech sector, which has been shifting for nearly six months? Some statistics and market action suggest that the sell-off has gone far enough.

“Whether or not the market is sold out, you can say that the technology in particular is on the rise. Both Microsoft and Meta have returned to their respective 50-day averages, but not quite. These seem important points,” says Frank Gretz. , a technical analyst at Wellington Shields, said in a note to customers Friday.

It is possible that the sell-in-May trend in 2022 just started a little early.

However, there is still some concern that valuations in parts of the market remain too high.

“Adjusted for equity compensation, the free cash flow revenues of the median technology and communications services companies are lower than the overall market and the most defensive sectors. This suggests that cash flow has not reached the point where current technical valuation is supported,” Chris said. Wolfe Research’s Senyek said in a note to customers Friday.

Fed meeting ahead

One thing that could break a seasonal trend next week is the upcoming meeting of the Federal Reserve. The central bank will release an updated policy statement on Wednesday, followed by a press conference from Chairman Jerome Powell.

The market is forecasting a 50 basis point rate hike on Wednesday, but recent Fed speakers have signaled increasing aggressiveness in the fight against inflation.

“The question becomes ‘What will the Fed break?’ If they stick to their verbal contours, their verbal commitment to price stability, how far are they willing to go and what do they see that can break?” asked Quincy Krosby, chief equity strategist for LPL Financial.

One term that has emerged in recent weeks is “frontloading” – the potential for the Fed to make multiple increases of 50 basis points or higher in the coming months to get close to or even above its assumed neutral policy rate.

According to the CME FedWatch tool, traders may see the Fed funds rate rise to 3% or higher by the end of the year.

“They have the luxury of a strong job market right now. Why don’t they go in and get the best out of their toolbox and try to slow the demand as quickly as possible,” Krosby said.

Following the Fed news on Wednesday, investors will receive key labor market data on Thursday’s unemployment claims and Friday’s nonfarm payrolls.

The monthly jobs report for April could receive some extra attention this week after a surprisingly negative gross domestic product in the first quarter. While that decline was largely driven by export and inventory numbers, traders and money managers are watching closely for signs of economic deterioration in the US

Events calendar

Monday 2 May

Income: Moody’s, Nutrien, NXP Semiconductors NV, Williams Companies, Devon Energy, Global Payments, Arista Networks, Expedia, Mosaic, ON Semiconductors, Diamondback Energy, Clorox, MGM Resorts International, Avis Budget

9.45 am. Markit Manufacturing PMI

10:00 am Construction Expenses, ISM Manufacturing

tuesday 3 may

Income: Pfizer, Estee Lauder, Advanced Micro Devices, S&P Global, BP, Airbnb, Starbucks, Illinois Tool Works, AIG, Marathon Petroleum, Hilton, Biogen, Match Group, Paramount Global, Restaurant Brands, Lyft

10:00 am Sustainable orders, Factory orders, JOLTS

Wednesday 4 May

Income: CVS Health, Booking Holdings, Regeneron, Uber, Marriott, Moderna, Pioneer Natural Resources, Fortinet, Ferrari, Yum Brands

8:30 am Trade Balance

09:45 Markit Services and Composite PMI

10:00 am ISM non-production

14:00 FOMC statement release

2.30pm Jerome Powell Press Conference

thursday may 5

Income: Royal Dutch Shell, ConocoPhillips, Anheuser-Busch, Zoetis, Becton Dickinson, Vertex, Dominion, Block, Shopify, Illumina, Monster Beverage, MercadoLibre

8:30 am Unemployment Claims, Labor Market Productivity and Unit Cost

Friday May 6

Income: Cigna, Icahn Enterprises, Formula One Group, NRG Energy, DraftKings

8:30am Nonfarm Payroll Report

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