Stock market returns between May and October are historically meager, but rotating into these 2 sectors could help investors beat the S&P 500, CFRA says

• “Sell in May” is a Wall Street saying that reflects the meager stock market returns from May-October.
• But CFRA’s Sam Stovall says investors should rotate into specfic sectors, not retreat entirely from the market.
• He says historically consumer staples stocks and health care stocks have outperformed the S&P 500 from May to October.
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“Sell in May and go away,” is the old adage on Wall Street that suggests investors take gains from the historically strong period from November to April and sit on the sidelines from May to October, a period when market returns tend to dwindle.

According to CFRA’s Sam Stovall, the price return for the S&P 500 from November through April has recorded the highest average price change of any rolling six-month period. Since 1946, the S&P 500 returns have averaged 6.8% from November to April, compared to a 1.6% gain from May-October.

With May around the corner, investors may be tempted to take profits and come back to the market in November, but the CFRA chief investment strategist recommends investors instead rotate into specific sectors from now until October.

Stovall recommends consumer staples and health care to carry investors through this historically sleepy period.

Since 1990 (as far back as S&P Dow Jones has sector-level data), while the overall market was eking out an advance of 2.2% from May-October, the S&P 500 consumer staples and health care sectors recorded average price gains of 4.6%, Stovall said.

“Indeed, a 50% exposure to the S&P Equal Weight 500 consumer staples and health care sectors in the M-O period following the top 10 four-month beginnings since 1990 saw the defensive sectors outpace the broader index by a more than 4:1 margin and beat the benchmark in seven of these 10 years,” said the chief investment strategist. “So should history repeat, and there’s no guarantee it will, embracing a more defensive posture in the coming six months may prove to be a prudent strategy.”

Also, the frequency of the S&P 500 posting a gain during the May-October period of “seasonal softness” is 65% since 1946, further suggesting that investors should remain invested, but rotate into sectors that historically have posted the best gains.

“History reminds us that ‘the Rules rule’ and that investors may still be well served by rotating defensively after such a jack-rabbit beginning,” said Stovall.