This May, for many reasons, investors remain skittish. While U.S. equities have had a glorious start to the calendar year, many of the gains have been erased. This may have some investors considering the “sell in May” myth and wondering if they should heed the advice of the old adage.
For example, the Dow Jones Industrial Average and the Russell 2000, which captures the performance of mid-to-small cap companies, ended January up 2.8% and 9.69%, respectively. But year-to-date, investors have begun to sell their holdings and the indices have roughly returned 0.83% and 0.75%, respectively.
The reason why? Noise on the macroeconomic front. In theory, equity investors should put their money in stocks for their intrinsic value and positive fundamentals. Nowadays, however, investors have been charged with parsing through U.S. economic data and predicting the monetary policy of the Federal Reserve.
However, despite all this seemingly bad news, the economy’s surprising resilience and the Federal Reserve’s newly found patience are reasons why investors should keep their money in stocks. Not to mention, the current volatility could bring a wealth of opportunities in the short and medium term.
Therefore, let’s dive into the reasons why the “sell in May” myth is exactly that — a myth.
Reason No. 1: The U.S. Economy Is Resilient
If you look back at headlines of the major financial newspapers in December 2022, it seemed most economists predicted a recession in both the United States and globally in 2023. Fortunately, the macroeconomic landscape has shifted for the better.
Now, many economists are predicting a recession to come “later than expected.” Additionally, commodities prices are on track to be less elevated this year: gas prices have fallen when compared to their high in 2022, and food prices are beginning to stabilize. This has surely lifted a lot of inflationary pressure off of consumers and will paint a slightly brighter economic picture.
Furthermore, the U.S. labor market has also proven to be a bright spot amid the current backdrop, even if the Fed doesn’t seem to think so. Businesses, particularly in the services sector, are still looking to invest in human capital, given the most recent jobs report. Plus, many publicly listed companies have reported higher-than-expected Q1 earnings. Ultimately, these are indicators of an economy that still has plenty of steam left in it.
Reason No. 2: The Fed Has Signaled a Shift in Strategy
To fend off domestic inflation brought on by rising commodities prices, the U.S. Federal Reserve began hiking rates in mid-March 2022. Since then, the central bank has hiked the key federal funds rate a whopping total of 10 times, effectively putting the federal funds rate to sit between 5% and 5.25%.
The Fed’s efforts have not gone without consequence. In the most recent consumer price index (cooler than expected at 4.9% year-over-year, while core inflation remained unchanged. These clear signs of cooling along with possible fragility in the regional banking sector has caused the Federal Reserve to rethink its rate-hike course.) report, headline inflation came in
During the Federal Open Market Committee (FOMC) meeting on May 3, the Fed decided to increase interest rates by an additional 25 basis points. But its subsequent press relief omitted the phrase: “the Committee anticipates that some additional policy firming may be appropriate.” This indicates additional rate hikes are not guaranteed; rather, the Fed has adopted a “wait and see” approach.
Despite the uneven economic data, inflation is trending downward, and the Federal Reserve’s decision to switch its approach could bring less volatility to equity markets and give investors less of a reason to sell.
Reason No. 3: Volatility and Patience Bring Opportunities
Given that Q1 earnings season is ongoing, May will continue to be a volatile month for stocks. Investors also remain focused on economic data releases, which can add to that volatility. If stockholders were to get fidgety and sell everything this month, they could lose out on potential opportunities in the market.
On the one hand, a host of companies, from large technology behemoths like Meta Platforms (NASDAQ:META) and Apple (NASDAQ:AAPL) to large retailers like Target (NYSE:TGT), have performed better than expected for the first three months of 2023. As more companies report and beat expectations, their share prices are likely to rise.
On the other hand, if there is a slew of economic data indicating a negative outlook that sparks a selloff, investors should not follow the herd. Rather, they should be keen to put money into stocks that fare well during recessions, such as defense, utilities or.
As Warren Buffet has said: “Be fearful when others are greedy, and greedy when others are fearful.”
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.