The S&P500 index looks poised for another month of solid gains. What can stand in the way of further gains?
The US economy started the year with strong momentum, as seen by the growth in the real Gross Domestic Product (GDP). The economy grew by 6.4% in the first quarter of the year, and the outlook for the rest of the year points to 7.2% growth, much better than expected only a few months ago.
The new trading month starts with the equity markets indices at their highs. The S&P500 and the Dow Jones have had a strong comeback from 2020 lows, posting new all-time highs.
Yet, some investors are aware of the old saying that May is typically a bearish month. “Sell in May and go away” is an expression familiar to traders, but is it true? If we look at the past returns for the month of May in the last decade, we may conclude the opposite. After all, buying the S&P500 index in May for the last ten years delivered strong performances. Why should it be different this time around?
Historical Data Points to a Bullish May
The S&P500 is considered the benchmark for the overall equity market, referred to as “the market” by most market participants.
Statistically speaking, when the S&P500 closes at a new monthly high in April, as it did this year, the following six months’ performance is even stronger. Moreover, when April’s performance is up more than 5% like it was this April, the next six months are up 6.2% on average.
This bullish bias continues if we dig more into past data. More precisely, there is only one year in history that delivered a performance similar to what we have witnessed in the past six months. In 1961, the S&P500 closed at a new monthly high – up more than 20% in the previous six months – and it was a post-election year.
After that, the S&P500 index delivered another 5.1% gain, suggesting the chances are good for a bullish May.
The primary damper to these gains is inflation. Higher inflation may easily spook equity market players, especially if central banks look weak in managing higher prices.
All in all, the month ahead will be interesting to watch. While historically speaking bulls do generally have the upper hand, we do not have a precedent of how the market will react in May after a pandemic.