Should I Sell in May and Go Away?

STOCK MARKET FORECAST: SELL IN MAY AND GO AWAY ANOMALY AT CONFLUENCE WITH CORONAVIRUS RECESSION, US-CHINA TRADE WAR TENSION

• ‘Sell in May and go away’ stock market anomaly appears underway as the Dow Jones gravitates lower alongside global equities
• Dow Jones price outlook remains threatened by underrated coronavirus recession risk
• Rekindled US-China trade war tension stands to exacerbate stock market selling pressure

The Dow Jones recorded an astonishing 34% climb from its March 23 low to April 30. Since investors flipped their calendars to the new month, however, US stocks and global equities have started to slide. This brings the sell in may and go away stock market anomaly into focus – a narrative explaining abnormally poor Dow Jones performance throughout May and summer months.

Sell in May and go away might look like a statistical phenomenon on the surface, and contradiction of the efficient market hypothesis, but taking a deeper dive into macroeconomic history, and drawing upon context of major financial crises, reveals fundamental catalysts often explain why the Dow Jones and broader stock market have experienced lackluster returns during May and summer months.

DJI PRICE CHART – DOW JONES INDUSTRIAL AVERAGE SEASONAL RETURNS: SELL IN MAY AND GO AWAY

For example, just looking at the past decade, Greece was on the verge of defaulting on its debt in May 2010. Summer of 2011 saw the ECB stave off the Eurozone credit blowup by implementing its bond-buying program to save Italy and Spain.

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China slashed its GDP growth estimates mid–2015 as it announced plans to restructure its economy for more sustainable growth. Similarly, the January effect, another seasonal stock market anomaly, can be explained by fundamental drivers as well.

DOW JONES PRICE OUTLOOK THREATENED BY CORONAVIRUS RECESSION, US-CHINA TRADE WAR

Chart created by @RichDvorakFX with TradingView

On that note, and in consideration of current market conditions, such as the likely unavoidable coronavirus recession, or reintroduced trade waruncertainty, the risk of another sharp stock market selloff looms large. Upcoming nonfarm payrolls data – due Friday, May 08 at 12:30 GMT – might motivate investors to unwind the recent stock market rebound driven largely by central bank liquidity.

This is considering a double-digit unemployment rate could providea harsh reminder of economic reality, fuel the return of risk aversion, and send the Dow Jones Index spiraling back lower. At the same time, as Trump talks tariffs, global equities face fresh headwinds from rekindled US-China trade war tension.

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Also, while investor complacency builds, the stock market seems increasingly detached from fundamentals currently pricing stocks at record-high valuations on a 12-month forward P/E basis. Dow Jones price outlook correspondingly remains bearish. In turn, it seems quite possible that the sell in May and go away stock market anomaly could come to fruition once again this year.

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— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight