Seasonal trends could be a drag on a stock market that needs a rebound

Investors will be looking for a reprieve after the worst month for stocks in more than two years, but the calendar may not get too friendly from here. 

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

The big drawdown comes on the eve of a historically weak period for stocks, with the “sell in May and go away” mindset officially beginning next week. According to the Stock Traders Almanac, an investor who held the Dow Jones Industrial Average between Nov. 1 and April 30, and then switched to fixed income for the next six months, would have produced solid returns with reduced risk for more than seven decades now. 

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

“Sometimes it has paid to lock in gains ahead of the traditionally challenging May-through-October periods. And this particularly goes for mid-term election years, also known as ‘sophomore slumps.’ Indeed, since 1992, the S&P 500 fell an average 3.4% in the May-through-October period of mid-term election years,” Stovall said in a note to clients Monday.

However, jumping to fixed income, as the simple strategy suggests, might not be smartest move. 

“Cashing out might not be the best option either, since equal exposure to the defensive consumer staples and health care sectors from May through October outpaced the broader benchmark 100% of these years and posted an average six-month total return of 5.6%,” Stovall wrote.

To be sure, those defensive sectors highlighted by Stovall have already been outperforming in recent weeks.

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

“Regardless of whether the market is sold out, you can argue Tech especially is due for a bounce. Both Microsoft and Meta have rallied back to but not quite through their respective 50-day averages. These seem key points,” Frank Gretz, a technical analyst at Wellington Shields, said in a note to clients on Friday.

It is possible that the sell-in-May trend simply started a bit early in 2022. 

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

“When adjusted for stock compensation, the median Tech and Communication Services companies’ free cash flow yields are below the overall market and most defensive sectors. This suggests that cash flow isn’t at the point at which to support current Tech valuation,” Chris Senyek of Wolfe Research said in a note to clients Friday. 

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

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

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

One term that has come up in recent weeks is “front loading” — the potential for the Fed to do multiple 50-basis point or higher hikes in the months ahead to get close to or even above the supposed neutral policy rate. 

According to the CME FedWatch tool, traders see the Fed Funds rate potentially rising to 3% or higher by the end of the year. 

“They have the luxury at this point of a strong labor market. Why not go in and take it from their toolkit as best they can and try to slow demand as quickly as possible,” Krosby said. 

After the Fed on Wednesday, investors will get key labor market data in jobless claims on Thursday and nonfarm payrolls on Friday. 

The monthly jobs report for April could have some extra attention on it this week after a surprise negative GDP reading for the first quarter. Though that decline was driven largely by export and inventory numbers, traders and money managers are watching closely for signs of economic deterioration in the U.S. 

Monday, May 2

Earnings: Moody’s, Nutrien, NXP Semiconductors N.V., 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 a.m. Construction spending, ISM Manufacturing

Tuesday, May 3

Earnings: 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 a.m. Durable orders, Factory orders, JOLTS

Wednesday, May 4

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

8:30 a.m. Trade balance

9:45 a.m. Markit Services and Composite PMI

10:00 a.m. ISM Non Manufacturing

2:00 p.m. FOMC statement release

2:30 p.m. Jerome Powell press conference

Thursday, May 5

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

8:30 a.m. Jobless claims, Labor market productivity and unit costs

Friday, May 6

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

8:30 a.m. Nonfarm payrolls report