Seasonal trends could be a drag on a stock market in need of a rally

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

Spencer Platt | fake images

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

Rising interest rates, some high-profile earnings losses and growing concerns about global growth weighed on the stock market in April.

The big drop comes on the eve of a historically weak period for stocks, with the “sell in May and walk away” mentality officially starting 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 have produced strong returns with reduced risk for more than seven months. decades. .

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

“Sometimes it has paid off to lock in profits ahead of the traditionally challenging May-October periods. And this applies particularly to midterm election years, also known as ‘second-year declines.’ In fact, since 1992, the S&P 500 has fallen an average of 3.4% in the May-October period of mid-term election years,” Stovall said in a note to clients on Monday.

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

“Withdrawing money might not be the best option either, as equal exposure to the defensive consumer staples and health care sectors from May to October outperformed the broader benchmark 100% these years and posted an average total return of six months of 5.6%”. Stovall wrote.

Were May sales early?

To be sure, the defensive sectors highlighted by Stovall have already outperformed in recent weeks.

And what about the technology sector, which has been falling for almost six months? Some metrics and market action suggest the selloff has gone far enough.

“Regardless of whether the market is exhausted, it can be argued that technology, especially, needs to pick up. Both Microsoft and Meta are back to their respective 50-day averages, but not quite. These seem to be key points.” Frank Gretz, technical analyst at Wellington Shields, in a note to clients on Friday.

The trend to sell off in May may have just started a bit before 2022.

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

“When adjusted for equity compensation, the free cash flow returns of mid-sized technology and communication services companies lag the broader market and most defensive sectors. This suggests that free cash flow is not at the point at which to support the current tech valuation,” Wolfe Research’s Chris Senyek said in a note to clients on Friday.

Fed meeting ahead

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

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

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

One term that has cropped up in recent weeks is “front loading” — the possibility that the Fed will make multiple hikes of 50 basis points or more in the coming months to get close to or even exceed the supposedly neutral policy rate.

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

“They have the luxury at this point of a strong job market. Why not go in and get it out of their toolbox as best they can and try to curb demand as quickly as possible,” Krosby said.

After Wednesday’s Fed news, investors will get key labor market data on jobless claims on Thursday and non-farm payrolls on Friday.

April’s monthly jobs report could get more attention this week after a surprise negative gross domestic product reading for the first quarter. Although that decline was largely driven by export and inventory figures, traders and money managers are watching closely for signs of economic deterioration in the US.

Events calendar

Monday, May 2

Profits: 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 a.m. Markit Manufacturing PMI

10:00 am Construction spending, ISM Manufacturing

Tuesday, May 3

Profits: 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 Enduring Orders, Factory Orders, SHAKE

Wednesday, May 4

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

8:30 a.m. Trade Balance

9:45 am Markit Services and Composite PMI

10:00 am ISM Non-Manufacturing

2:00 pm FOMC Statement Release

2:30 p.m. Jerome Powell press conference

Thursday, May 5

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

8:30 am Jobless Claims, Labor Market Productivity, and Unit Costs

Friday, May 6

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

8:30 am Non-Farm Payroll Report

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