Wall Street analysts start coming up with their views this time of the year thanks to the old adage “sell in May and go away.” The proverb is ingrained in the S&P 500’s awful historical run for the May-to-October period. May has been a subdued month with average gains of 0.17% since 1950. But the saying hasn’t held well in recent times.
Per an article published on CNN.com, the proverb proved itself wrong in the past few years with the May-October period turning pretty profitable. Since 2011, we had only one year (i.e. 2011) when the stock market crashed (down 7.1%) during the May-October period followed by meager gains in 2012 (up 2.2%), 2015 (up 0.8%) and 2018 (up 3.4%), per a Motley Fool article.
President Biden is reportedly planning to launch a capital gain tax hike in the coming days, which may definitely cause some threat to the upcoming market rally. But there are plenty of reasons that indicate threats from tax hike talks will be overshadowed by the upbeat market momentum in May. Let’s delve a little deeper.
Wall Street in High Momentum
The S&P 500 logged its third successive month of gains in April, adding more than 5% to the index thanks to upbeat economic recovery. The S&P 500 has now added 11% for the year. While the S&P 500 and the Dow Jones have hovered around their all-time highs throughout April or hit new highs, the tech-heavy Nasdaq Composite also recorded its first all-time closing high in more than two months. With the economy recovering fast from the pandemic, we do not expect the momentum crash in the near term.
Upbeat U.S. Economic Data Points
Upbeat economic data should help the rally to continue. The U.S. economy grew an annualized 6.4% in the first quarter of 2021, breezing past expectations of 6.1%, following a 4.3% uptick in the previous three-month period. Apart from the reopening-driven third-quarter jump last year, the latest reading marked the best period for GDP since the third quarter of 2003. The labor market is steady and the latest retail sales were also promising (read: ETF Areas to Win on Smashing Q1 U.S. GDP Growth).
Gregory Daco, chief U.S. economist at Oxford Economics estimates that the domestic economy will expand about 13% year over year in Q2. For the year, it expects growth of 7.5%, the best performance since 1951, a New York Times article noted. This means that the winning market momentum will not settle down soon.
Consumers Sitting on Good Savings
Thanks to multiple rounds of government relief payments, households now hold a joint $4.1 trillion in savings in the first quarter, considerably up from $1.2 trillion before the pandemic began. Such high savings are likely to be invested in the stock market as government bond yields are still quite lower than the pre-pandemic period.
Capital Gain Tax Hike Not a Big Concern?
In 2013, the S&P 500 added about 30% despite the nine percentage-point increase in capital gains tax rate. In 1981, the S&P 500 skidded 10% despite the drop in the tax rate by about eight percentage points, a Barrons’ article noted.
Moreover, the move of capital gain tax hike would hurt earnings of the top 0.3% of Americans. Plus, the proposal may come across as less tough during negotiations in Congress. For example, UBS expects a 28% long-term capital gains tax rate instead of 39.6%, as quoted on CNBC (read: Likely Capital Gain Tax Hike a Buying Point for These ETFs?).
Any Caveat to Market Rally?
After a superb run in 2020 and the early phase of 2021, some profit booking is natural now. A spike in inflation and a likely capital gain tax hike would cause some sell-offs in the near term, though it might not continue for six months up until October.
ETFs in Focus
Against this backdrop, below we highlight a few ETFs that could be worth buying in May.
SPDR S&P Bank ETF KBE
Banks are in the sweetest spot as strong household savings ruled the fear for delinquencies or default on loans in the banking sector. In any case, banking is an undervalued sector currently. Earnings have been upbeat in the sector. A prospective rising rate environment is another plus for the banking stocks. KBE is thus a good bet (read: Banking Earnings Upbeat: Time to Buy Financial ETFs on Value?).
Invesco QQQ QQQ
With vaccination and economic reopening taking root, some foresee moderate success for the tech-heavy Nasdaq – which was a lockdown winner – this year. But big tech companies or most of the FAANGs have come up with blowout earnings in the ongoing reporting season, indicating that economic reopening is no hindrance for the space. Growth rates of the tech sector may subdue ahead, but the sector is well poised to take advantage of the New Normal in the coming era (read: ETFs to Stack as Reopening Poses No Hindrance for Big Tech).
Consumer Discretionary Select Sector SPDR ETF XLY
The chief U.S. economist at Oxford Economics expects consumer spending to expand by more than 9% this year, a record, as quoted on New York Times. A higher savings rate and easing restrictions thanks to increasing vaccination would allow consumers to spend on goods and services affluently.
SPDR S&P Dividend ETF SDY
The fund measures the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed dividend policy of consistently increasing dividends every year for at least 20 consecutive years. It yields 2.58% annually (read: 5 Dividend ETFs Hovering at Record High).
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INVESCO-QQQ TS (QQQ): ETF Research Reports
SPDR-KBW BANK (KBE): ETF Research Reports
SPDR-CONS DISCR (XLY): ETF Research Reports
SPDR-SP DIV ETF (SDY): ETF Research Reports
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