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Don't Sell & Go Away in May, Follow These 5 Strategies Instead

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Wall Street regained momentum at the start of May on the back of solid corporate earnings and renewed bets for Fed rate cuts. In fact, major indices have risen in the last three days, with the S&P 500 logging its best three-day run of 2024. Meanwhile, Treasury yields wrapped up the last week with the biggest weekly drop in at least three months.

Will the rebound continue for the rest of the month, given the weak seasonal trends? After all, the adage “Sell in May and Go Away” says investors should sell their stocks in May and re-enter the market in November to capitalize on the historically strong performance of equities between November and April. It denotes traditional market underperformance during the summer months (May to October).

In such a scenario, investors might consider several investment strategies to navigate the May-October period more effectively, which could lead to a winning portfolio.

Behind the Recent Rally

The picture emerging from the first-quarter earnings season continues to be one of steady improvement and resilience, with the earnings growth pace modestly accelerating and estimates for the coming periods starting to increase. Total earnings of the 310 S&P 500 members that have reported results are up 5% from the same period last year on 4.5% higher revenues, with 78.1% beating EPS estimates and 59.4% beating revenue estimates.

A softer-than-expected jobs report revived bets for an earlier rate cut from the Federal Reserve. The United States added a lower-than-expected 175,000 jobs last month, and the unemployment rate unexpectedly jumped to 3.9%. After growing for 15 consecutive months, U.S. service sector activity also unexpectedly contracted in April. The futures market is now pricing in at least two interest rate cuts by the end of the year. Traders are now wagering that the central bank will begin trimming rates as soon as September but still maintained only around a 44% probability of such a scenario, according to the CME Fedwatch tool.

In another recent weak data, consumer confidence dopped last month to the lowest since mid-2022. Additionally, the world's biggest economy had a weak start to the year due to lower consumer and government spending amid growing inflation. The economy expanded at the slowest pace in two years, with GDP rising 1.6% annually in the first quarter.

While the weak data has pushed up bets for sooner-than-expected rate cuts lately, the Fed signaled that its fight against inflation will continue for a longer period, setting the stage for a period of extended higher rates. In its latest meeting, the Fed kept interest rates steady at a 23-year high in the range of 5.25% to 5.5%, citing a “lack of further progress” on inflation. Powell reiterated that it will now take longer than expected for the Fed to reach the confidence that inflation is moving sustainably down to 2%. This indicates that rate cuts are not in the cards anytime soon.

Will Elections Make a Difference?

Volatility and uncertainty are expected to increase as this is a Presidential election year in the United States. But, according to Carson Group data going back to 1950, stocks have historically rallied during the summer in presidential election years. The S&P 500 rose 2.3% on average during the May to October period during election years and was higher 77.8% of the times. Per Schaeffer’s research, the S&P’s average six-month return leading up to a Presidential election in early November is 4.67%, which compares with 2.14% in non-election years and 0.95% in mid-term election years.

Investment Strategies to Follow

Sector Rotation

Rotating the investments in sectors that have historically performed well during the May-October period, such as consumer staples, utilities, and healthcare, could be beneficial. The consumer staples and healthcare sectors have climbed 4.1% on average during the hotter months since 1990, outperforming the broader market’s 2.1% advance, according to CFRA Research.

Pilgrim's Pride (PPC - Free Report) , which is engaged in the processing, production, marketing and distribution of frozen, fresh as well as value-added chicken products, seems an excellent option. This Zacks Rank #1 (Strong Buy) company saw a solid earnings estimate revision of 50 cents over the past seven days for this year with an estimated growth rate of 107.7%. The stock has a solid VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dividend Investing

Focusing on dividend-paying stocks can provide a steady income stream and help mitigate potential losses during weaker market periods. These stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

Enterprise Products Partners (EPD - Free Report) , carrying a Zacks Rank #2 (Buy), can fit well in this category. It is among the leading midstream energy players in North America, with a market cap of $60.9 billion. The stock saw a positive earnings estimate revision of 7 cents over the past seven days for this year and has an estimated growth rate of 6.7%. EPD sports a dividend yield of 7.33% annually and has a VGM Score of A.

Low-Beta Focus

Low-beta stocks exhibit greater levels of stability and usually lose less when the market is crumbling. Though these have fewer risks and lower returns, the stocks are considered safe and resilient amid market turbulence.

Lancaster Colony Corporation (LANC - Free Report) is a manufacturer and marketer of specialty food products for the retail and foodservice markets. It saw a positive earnings estimate revision of 7 cents over the past seven days for the fiscal year (ending June 2024) with an estimated growth rate of 35.4%. The stock has Zacks Rank #2 and a VGM Score of A.

Value Addition

Value investing is an investment strategy that focuses on purchasing stocks that are undervalued relative to their intrinsic value. Value stocks seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts. These are less susceptible to the trending markets and their dividend payouts offer safety in times of market turbulence. (AMZN - Free Report) is one of the largest e-commerce providers. It saw a solid earnings estimate revision of 44 cents over the past seven days for this year and has an expected earnings growth of 56.5%. Amazon carries a Zacks Rank #2 and has a Value Score of B.

Quality Bet

Quality investing also seeks safety and protection against volatility. Quality stocks tend to outperform as these are rich in value characteristics with healthy balance sheets, high return on capital, low volatility, elevated margins and a track of stable or rising sales and earnings growth.

Agnico Eagle Mines Limited (AEM - Free Report) is a gold producer with mining operations in Canada, Mexico and Finland and exploration activities in Canada, Europe, Latin America and the United States. It has a low debt/equity ratio of 0.09, 5-year historical EPS growth of 29.4%, an estimated growth rate of 8.8% for sales and 44.8% for earnings this year, and a dividend yield of 2.46%. The stock further belongs to a top-ranked Zacks industry (top 10%) and has a Zacks Rank #1. AEM also has a solid VGM Score of B.

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