The stock market is defying 'sell in May and go away'. Why the U.S. presidential election could aid summer rally.

By William Watts

S&P 500 books strongest May performance since 2020

The S&P 500 index just booked its strongest May performance since 2020. Investors may wonder if that bodes well for a summer rally as the market appears to defy the popular Wall Street adage, "sell in May and go away."

"Momentum leads price and a strong May increases the odds of a decent summer rally," Ed Clissold, chief strategist at Ned Davis Research, told MarketWatch in a Friday phone interview.

Of course, macroeconomic factors including inflation reports, jobs data, remarks by Federal Reserve officials and other events are going to drive market returns, "but overall inertia is one that's in a pretty solid uptrend," he said. "In other words: a bull market until proven otherwise."

If the rally does continue, it would also be in keeping with a pattern often seen in presidential election years, Clissold and others have noted.

The S&P 500 SPX rose 4.8% in May, its strongest performance for the month since a since a 5.3% rise in 2009 as stocks were rallying off the financial-crisis low set in March of that year. The S&P 500 averages a decline of 0.1% usually in May, according to Dow Jones Market Data, which noted that May is typically the second worst-performing month of the year (see chart below).

That historical performance helps explain the popular Wall Street adage, "Sell in May and go away." The period from May to November is historically the weakest for the market, though analysts and investors have argued that the saying oversimplifies the phenomenon.

Clissold, in a note earlier this week, observed that since 1950 the S&P 500 has risen 77.8% of the time from April 30 to Oct. 31 in election years, that's the strongest of the four years in the presidential election cycle. The 3.3% median gain seen over that stretch in election years is the second highest (see table below).

A close-fought election, in which the likely winner isn't clear until late in the race - or beyond - could put a damper on the market, Clissold warned. He noted that the best election-year market performances tended to occur when the outcome of the race became relatively clear early in the race.

Closely fought elections leave investors uncertain over what the outcome will mean. He noted that in 1996, with Bill Clinton's re-election never in much doubt, the market saw a January bottom and produced a 20.3% gain for the full year. In contrast, George W. Bush's 2004 re-election remained unclear well into election night, with the S&P 500 falling 1.5% year-to-date through Oct. 25 before rallying 10.7% into year-end.

That said, the fact that neither Biden nor Trump faced serious primary challengers may have helped keep a lid on investors' sense of uncertainty earlier this year, Clissold said.

History may only get investors so far though. After all, it's hard to ignore how unique 2024 is shaping up to be compared with other presidential election years. Trump on Thursday became the first former president to be convicted of a felony, after becoming the first former president to face a criminal trial.

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It isn't clear whether that conviction will hurt or help his chances. Meanwhile, the anticipated race between Biden and Trump would mark the first rematch of Democratic and Republican nominees since 1956 and the first time an ex-president and an incumbent have battled for the White House since 1892.

The sell-in-May strategy hasn't had a good run in recent years, regardless of the presidential cycle, Clissold noted. Since 2012, the S&P 500 has risen 10 times out of 12 by a median 3%. But that doesn't mean investors should ignore the phenomenon, which is demonstrated in data going back to 1950, he said.

As for this year, it's simply be too early to tell whether "sell in May" has been rendered moot, said Steve Sosnick, chief strategist at Interactive Brokers, in a note earlier this week.

"A popular refrain that I've heard recently is that 'Sell in May' hasn't worked this year. Indeed, so far it hasn't. But all we really know is that 'Sell in April' and 'Sell in early May' haven't worked," Sosnick wrote. "We won't, or can't, know if 'Sell in May' worked until June at the earliest."

Also read: Do you avoid the stock market's worst six months or hold on?

-William Watts

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06-01-24 0645ET

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