May has historically marked the start of the “worst six months” for stocks. Returns for the major stock indexes over the period of May through October have historically lagged those of the “best six months” (November through April). Worst shouldn’t be confused with terrible, as the S&P 500 index averaged a 1.5% gain for May through October periods between 1950 and 2017 according to LPL Financial Research. The returns for the Dow Jones industrial average are not significantly different.
Midterm election years are a bit different. CFRA Research’s chief investment strategist Sam Stovall calculates the S&P 500 as averaging a 1.1% decline when the worst six-month periods occur in a midterm election year. Though the sample size is small (Stovall’s data goes back to 1946), the average loss when the midterm election is held during a president’s first term is 3.0%. A longer study by professors Kam Fong Chan of the University of Queensland and Terry Marsh of University of California Berkeley found that the premium over the one-month Treasury rate for investing in stocks averaged –1.72% between the period of June through October during midterm election years occurring between 1815 and 2015.
Before using the negative return relative to the one-month Treasury rate as an excuse to leave the market, there are four things to consider. First, since 1946, the midterm election year performance of the S&P 500 between April and October has been a coin toss, up nine times and down nine times. Second, the magnitude of losses is not always big. Stovall’s data shows four midterm years with single-digit May-October losses. His data also shows five double-digit losses for the S&P 500 over the last 18 midterm election years’ worst six-month periods: 1946: –20.9%; 1962: –13.4%; 1966: –11.9%; 1974: –18.2%; and 2002: –17.8%. Third, John Lynch and Ryan Detrick (the chief investment strategist and senior market strategist, respectively, of LPL Financial Research) calculated an average 5.5% gain for the S&P 500 over the May through October period during midterm election years when the index was above its 200-day moving average trend and the S&P 500 had realized a positive return during the previous six-month period. This has occurred nine times since 1950. This year just happens to be a midterm election year when stocks went into May with trailing six-month gains (yes, even with the January correction factored in) and the S&P 500 above its 200-day moving average.
More on AAII.com
- Using Seasonal and Cyclical Stock Market Patterns – Jeffrey Hirsch of the Stock Trader’s Almanac explains the best/worst six-month strategy in greater detail.
- The Trinity Portfolio: Combining Diversification, Tilts and Trend-Following – Mebane Faber explains how to strike a compromise by using both a trend-following and a buy-and-hold approach in the same portfolio.
Highlights from this month’s AAII Journal
- A Look Back at History: Lessons From the Financial Crisis – Lessons from the last bear market that still remain very valid today.
- Searching for Future Stock Market Winners – A study of past big winners identified common traits centered around value, earnings growth and price momentum.
AAII Sentiment Survey
Optimism rebounded, but continues to remain below its historical average. Plus, members discuss their thoughts about the inability of the Dow Jones industrial average and the S&P 500 index to revisit their previous highs. More about this week’s results.
- Bullish: 33.5%, up 5.1 points
- Neutral: 41%, down 0.4 points
- Bearish: 25.5%, down 4.7 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
What’s Trending on AAII
- The Four Groups of ETFs
- Most Mutual Funds Do Not Outperform
- The Basics of Real Estate Investment Trusts (REITs)
The Week Ahead
Earnings season will start to shift toward retailers, with Home Depot Inc. (HD) announcing its results on Tuesday and Walmart Inc. (WMT) releasing its earnings on Thursday. There will be companies from other sectors reporting as well, including fellow Dow component Cisco Systems Inc. (CSCO) on Wednesday. Joining these three companies will be seven other members of the S&P 500 plus many smaller companies.
The week’s first economic reports will be April retail sales, the May Empire State Manufacturing Survey, March business inventories and the May housing market index on Tuesday. Wednesday will feature April housing starts and building permits and April industrial production. The May Philadelphia Fed Business Outlook Survey will be released on Thursday.
Five Federal Reserve officials will make public appearances: Cleveland president Loretta Mester and St. Louis president James Bullard on Monday; San Francisco president John Williams on Tuesday; Atlanta president Raphael Bostic and St. Louis president James Bullard on Wednesday; Minneapolis president Neel Kashkari on Thursday; and Cleveland president Loretta Mester on Friday.
The Treasury Department will auction $11 billion of 10-year TIPS (treasury inflation-protected securities) on Thursday.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!