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Bank of America expert: US stock market could be in for a summer rally
A well-known stock market adage is "Sell in May and go away," sometimes extended by the addition of thinking about a return in September. But this advice leaves a lot to be desired, says a Bank of America expert. Investors who follow it could even miss out on a summer rally.
The summer months are also a time of vacation for the stock market, which usually means a summer slump. This is also reflected in the stock market adage "Sell in May and go away". But the summer months are actually not as bad as their reputation, says analyst Stephen Suttmeier of Bank of America. He does believe that stock prices could come under pressure in May, but a summer rally should follow after that.
Historical data argues against stock market wisdom
As "Fortune" reports, Suttmeier analyzed various multi-month periods over several decades to determine what returns could be earned in each case. "Seasonality since 1928 shows that [the period] May through October has the lowest average and median returns of all six-month periods of the year," the expert said, according to the business magazine. Which looks thereby at first after a confirmation of the stock exchange wisdom already mentioned, is it with a more exact view however not. Because as Suttmeier further explains, the S&P 500 rose in the predominant case, i.e. in 65 per cent of the years, in this period and obtained an average net yield of 2.16 per cent and an average net yield of 3.11 per cent. Both the average and the median return for this period were therefore not negative, which is why the "Sell in May" strategy does not really seem to make sense.
May itself was one of the weakest stock market months, with an average return of -0.04 percent, according to Bank of America data, but prices also rose in May in 59 percent of the years considered. "May can be a weak month for the [S&P 500] ... [but] if you sell in May and walk away, you could miss a summer rally," Suttmeier said, according to Fortune. "The seasonal pattern actually suggests that you sell in April and then buy back on any downward swing in May, because there is a tendency to get a summer rally," the analyst also elaborated in an interview with "CNBC." So, in his opinion, investors should use the rather weak month of May to buy - and not to sell during this period of potentially lower prices. In addition, June through August is the second-best three-month period of the year, he said, if you look at three-month seasonality, for example. That's when the S&P 500 rises an average of 3.15 percent, according to Bank of America data. "Therefore, you tend to get a summer rally," Suttmeier reiterated to the U.S. station.
Therefore, instead of "Sell in May and go away," Suttmeier said it should be "Buy in May and sell in July and August." This is because August is followed by September, the weakest stock market month of the year, and we are entering the fall, when larger corrections are more likely. According to Suttmeier, a look at the three-month periods also showed that the period from August to October was the worst for stock prices. Therefore, the three-month seasonality "also points more to a July/August sell-off than a May sell-off," he said. This means that the SPX tends to get a summer rally, and the weakness from May to October plays out at the back end [of the period]," he said, according to Fortune.
State of Joe Biden's term in office also gives cause for hope
According to the expert, the theory that stock market development is roughly based on the U.S. presidential cycle also speaks in favor of rising share prices this year. According to this theory, stock prices peak in the third year of a U.S. president's term in office before falling again in the fourth year before the elections. Since U.S. President Joe Biden took office in January 2021, the third year of his term is now in full swing. According to Stephen Suttmeier, the first quarter is usually the strongest for stock markets in this regard, but the second-best performance comes in the second quarter of the year, from April to June. "This suggests that year three also has a tendency to a summer rally before a fall in the fall," the analyst told Business Magazine.
Technical analysis suggests May decline before rally begins
A third argument for an imminent summer rally comes from chart technology. As Stephen Suttmeier wrote in a note to Bank of America clients at the end of April, obtained by Business Insider, technical indicators would suggest that there is still a downward movement in May before a period of rising prices follows. This is suggested, among other things, by the expected range of fluctuation of the S&P 500, which is represented by the volatility index VIX. For example, he said, the ratio of the expected volatility of the stock market for three months compared to the expected volatility for 30 days peaked below a value of 1.25. "Peaks of this indicator below the overbought threshold of 1.25 have spelled trouble for the S&P 500 (SPX) in March, August and December 2022. A similar pattern formed in late April ahead of weaker seasonality in May, which tends to precede a summer rally," Suttmeier wrote, according to Business Insider.
If a rally occurs in the summer months, the analyst expects the S&P 500 could rise as high as 4,325 points, according to the news portal. Compared to the current closing price of 4,138.12 points, this would roughly correspond to a gain of 4.5 percent (as of the closing price on May 08, 2023). The broad US index could thus once again significantly extend its gains since the beginning of the year.