Wednesday is May 1. Should that frighten investors? The old saying, "Sell in May and go away" is not just folklore — stock market history supports it.
History shows stock market performance tends to sag from May to October compared with the November-April period. Still, investors can expect low single-digit gains over the next six months.
Going back to 1928, the S&P 500's yearly performance from November to April has consistently been the stronger six-month cycle of the year. Dow Jones Market Data says the S&P 500 averages a gain of 5.2% during the November to April periods. This is more than double the 2.1% rise in the May to October cycle.
Stock Market May Spook Investors
The trend has only strengthened since 1950, with a 7% increase for the November-start cycle vs. a modest 1.7% for the May-start cycle.
But the results have been less dramatic in the last 10 years, with the November-April period gaining 5.5% vs. a 4% increase the other six months. And the gap has widened slightly over the last five years, to 6% vs. 4%, according to Dow Jones Market Data.
With the November-April period ending Tuesday, the trend looks almost sure to continue this year. The S&P 500 has gained 22% since the end of last October. That's on track for the best November-April stretch since a 27.9% gain over the November 2020 to April 2021 period.
Presidential Cycle Gives Investors Some Hope
During election years, the average S&P 500 performance for May through October has tallied 4.2%. This far outperforms the 2.6% rise in the pre-election year, the 2.1% increase in the postelection year and a drop of 0.5% in the midterm year.
Although historical trends are important, investors who follow IBD's investing style know the most important strategy is to stay in tune with the major indexes. The stock market went into a correction earlier this month as the Nasdaq, S&P 500 and Dow Jones Industrial Average broke below their 50-day moving averages. Indexes also piled up many distribution days.
But indexes are making a rally attempt, so a market uptrend could be starting just as other investors are running away from the historical trend.
Stock Market Still Gains In Weaker Months
And while returns may tend to be lower, skipping the May-October period would still mean forfeiting gains.
There's also a bad-luck factor in the historical trend, says Jessica Rabe of DataTrek Research. For example, the total compounded annual price return of the S&P 500 is 4,319% back to 1980. The gain is 531% taking just January through May and 297% in November-December Santa Claus Rally period.
"The five months after May have produced weaker returns than the five months that precede it or two months that follow over the last +four decades, but that's largely due to a handful of exogenous shocks," Rabe wrote in a note Tuesday. The 2008 financial crisis, Iraq's 1990 invasion of Kuwait and the 9/11 attacks caused some of the worst market declines.
Follow Kimberley Koenig for more stock market news on X/Twitter @IBD_KKoenig.
