Seasonal trends could be a drag on a stock market that needs a bounce

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

Spencer Platt | Getty Images

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

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

The big pullback comes on the eve of a historically weak period for stocks, with the “sell in May and go” mindset 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 over seven decades now. .

This seasonal weakness can be particularly pronounced during midterm election years, according to Sam Stovall, chief investment strategist at CFRA.

“Sometimes it has paid to lock in gains ahead of the traditionally tough times from May to October. And that’s especially true in midterm election years, also known as ‘second-year slumps.’ , since 1992, the S&P 500 has fallen an average of 3.4% during the May-October period of midterm election years,” Stovall said in a note to clients on Monday.

However, switching to fixed income, as the simple strategy suggests, might not be the smartest move.

“Drawback may not be the best option either, as equal exposure to the defensive Consumer Staples and Healthcare sectors from May to October outperformed the broader benchmark by 100% of these years and posted a six-month average total return of 5.6%,” Stovall wrote.

Did the May sale come early?

Admittedly, the defensive sectors highlighted by Stovall have already outperformed in recent weeks.

And what about the tech sector, which has been in decline for almost six months now? Some market metrics and actions suggest the selloff has gone quite far.

“Regardless of whether the market is exhausted, you can argue that Tech in particular needs to rebound. Microsoft and Meta rallied, but not quite, to their respective 50-day averages. These seem key points,” Frank Gretz, a technical analyst at Wellington Shields, said in a note to clients on Friday.

It’s possible that the May sales trend simply started a little early in 2022.

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

“Once adjusted for equity compensation, median free cash flow returns for technology and communications services companies are lower than the overall market and most defensive sectors. cash are not at the point to support the current valuation of the technology,” Chris Senyek of Wolfe Research said in a note to clients on Friday.

Fed Meeting Upcoming

One thing that could break a seasonal trend next week is the upcoming Federal Reserve meeting. The central bank is expected to issue an updated policy statement on Wednesday, followed by a press conference from Chairman Jerome Powell.

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

“The question is, what is the Fed going to break? If they stick to their verbal plan, their verbal commitment to price stability, how far are they willing to go and what is what they see can break,” said Quincy Krosby, chief equity strategist for LPL Financial.

A term that has popped up in recent weeks is “front loading” – the potential for the Fed to make multiple hikes of 50 basis points or more in the coming months to come close to or even above the assumed neutral key rate.

According to CME tool FedWatch, traders see the Fed Funds rate potentially rising to 3% or more by the end of the year.

“They have the luxury at this stage of a strong labor market. Why not go into their toolbox as best they can and try to slow down demand as quickly as possible,” Krosby said.

After the Fed on Wednesday, investors will get key labor market data on jobless claims on Thursday and nonfarm payrolls on Friday.

April’s monthly jobs report may get extra attention this week after a surprise negative GDP reading for the first quarter. Although this decline was largely driven by exports and inventories, traders and fund managers are watching closely for signs of economic deterioration in the United States.

Event calendar

Monday May 2

Earnings: 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 a.m. Construction spending, manufacturing ISM

Tuesday, May 3

Earnings: 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 a.m. Sustainable Orders, Factory Orders, JOLTS

Wednesday May 4

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

8:30 a.m. Balance of trade

9:45 a.m. Markit Services and PMI Composite

10:00 a.m. Non-manufacturing ISM

2:00 p.m. Publication of the FOMC press release

2:30 p.m. Press conference by Jerome Powell

Thursday May 5

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

8:30 Unemployment Insurance Claims, Labor Market Productivity and Unit Costs

Friday, May 6

Earnings: Cigna, Icahn Enterprises, Formula 1 Group, NRG Energy, DraftKings

8:30 a.m. Report on non-farm wages