If we break out the study a little further, it becomes clear that all of the weakness experienced with this stock market lore has occurred in midterm election years. Since 1950, the midterm election year is the only year to have had an average decline in the May 1 to Oct. 31 period—an average of 0.37 percent, to be exact. The other three years in the cycle averaged gains of 1.82 percent during the May 1 through Oct. 31 period.
The chart below illustrates that the pattern of returns in the midterm election years (shown in blue) is dramatically different from other years (shown in black).
And that raises the question, Should investors heed the warning about potential risks as we move well into the second quarter? History suggests yes.
In addition, the rotational correction we’ve witnessed also hints at a market that’s getting more defensive. For investors who want to stay invested, potential risks notwithstanding, we would heed the market’s recent shift to defensive allocations and look toward higher dividend plays.
One such play in an exchange-traded wrapper, as I noted passingly above, is HDV, which has a 12-month dividend yield of 3.11 percent and a one-year beta against the S&P 500 Index of 0.76. The sector exposure is dominated by consumer staples, health care and utilities, which are typically defensive in nature.
After all, let’s remember that even in a declining market, there are opportunities somewhere—or at least areas that can offset losses occurring in the broader market.
In the end, “Sell in May and go away” might have some truth in it.
However, by digging a little deeper into market and economic history, we can uncover more specific triggers for market declines over the summer months and make more educated investment decisions.
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