The S&P 500 Index reached a fresh new high October 28, eclipsing the previous high of 3,025 set July 26, 2019. Recent gains have been impressive amid heightened economic and geopolitical uncertainty, and we believe fundamentals are still supportive of stocks. Now that we’ve entered the historically best six-month period of the year for stocks, could more gains be in store?
Best Six Months Of The Year
We have all heard the old Wall Street adage, “Sell in May and go away.” The six-month period from May through October historically has been the worst time of year to own stocks, while the six months between November and April historically have been the best [Figure 1]. Friday, November 1, marked the start of this favorable seasonal period that, as history has shown, can stand a good chance of delivering gains for stocks. In the short term, the calendar also looks very friendly: November and December historically have been the best two months of the year for the S&P 500.
“Selling in May” did not work as well this year, as the S&P 500 rose 10% from May 31 through October 31. While some might worry that increase could mean future gains were pulled forward, we think fundamentals are good enough to help propel stocks higher over the next six months.
Positive Market Drivers
We have seen several positive market drivers that we think could help drive stock gains between now and April 2020. We expect continued steady economic growth near the recent trend, bolstered by a healthy consumer who is enjoying low unemployment and rising wages. Strong consumer spending was evident in last week’s gross domestic product (GDP) report. Friday’s jobs report showed slower job gains due to the impact of the General Motors strike, so we would expect a bounce back next month, and wages rose at a solid 3% annual pace. Capital spending has been disappointing, but productivity has been on the upswing and may help elongate the economic expansion by keeping inflation and the Federal Reserve (Fed) at bay. Finally, fiscal stimulus (tax cuts and government spending) and recent progress on trade are supportive, while more stimulus may be coming as President Trump tries to add to his economic resume ahead of next year’s election.
The Fed has provided further cause for optimism. On Wednesday, October 30, as expected, the Fed cut rates by 25 basis points (0.25%) for the third time this year. When the Fed has cut interest rates by a quarter point three times after a series of interest rate hikes, stocks historically have delivered impressive returns. As we wrote in our October 29 blog, after three initial quarter-point cuts in 1975, 1996, and 1998, the S&P 500 rose an average of 10% six months later, and 20% 12 months later.
The Fed may provide support for stocks for some time, based on Fed Chair Jay Powell’s comment last week that the Fed would have to see a significant pickup in inflation to consider hiking rates. In our opinion, that’s probably a good ways off.
Record Highs