With the start of May, market pundits are curious whether the old adage “Sell in May and Go Away” will hold true this year. The performance of the stock market has been historically weak during the summer months (May to October) given that seasonality plays a huge role in pushing stocks down during these months.
The adage is however losing significance in recent years. This is especially true given the latest Dow Jones Market Data, which shows that stocks over the six-month span ending October posted comparatively weaker returns in only three of the past five years. In particular, 2017 was a strong year with more than 8% returns in the May-October period, compared with only 2.8% gain from November 2017-April 2018. The period from November 2018-April 2019 produced a return of roughly 8.6%.
Encouraging Market Trends
The major U.S. bourses, especially the S&P 500 and the Nasdaq Composite Index, are hitting new all-time highs lately driven by bouts of upbeat data and better-than-expected earnings, which eased fears of recession (read: 5 Top-Ranked Stocks in S&P 500 ETF Up More Than 50%).
In particular, the U.S. economy expanded at a faster-than-expected rate of 3.2% in the first quarter of 2019, marking the best GDP growth to start the year since 2015. Consumer confidence bounced back sharply in April, underscoring that Americans are optimistic about economic conditions. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased by the most in more than nine-and-half years in March.
Meanwhile, corporate results have turned out better than many had expected in the market. Of the 230 S&P members that reported Q1 results through Apr 26, 79.1% beat EPS estimates while 58.7% beat revenue estimates. The proportion of EPS beats in Q1 at this stage is the second highest for this group of 230 S&P 500 members in the last five years though revenue surprises are modestly on the lower side relative to other recent periods.
Additionally, the Fed’s patient monetary approach, low inflation, and wage increases at the fastest pace in almost a decade are driving the decade-long bull market and are expected to do so in the months ahead. Further, hopes of a U.S.-China trade deal and a surge in oil price also bodes well for the economy and the stock market (read: 10-Year Bull Market to Rage Ahead in 2019: 10 ETF Bets).
However, global slowdown concerns as well as still unresolved U.S.-China trade tensions might continue to weigh on the stocks. Against such a bullish backdrop, it might be foolish to quit the stock market altogether. Instead, investors could follow some strategies that could lead to a winning portfolio during this soft six-month period.
Make a Hot Sector Your Friend
Though a high beta sector, technology has been soaring this year and the current fundamentals will continue to drive the sector higher. Its future growth story remains intact with the emergence of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, artificial intelligence and machine. The deployment of 5G (fifth-generation) technology — the next wireless revolution — is creating further opportunities. The wave of mergers and acquisitions is also providing further impetus to the space.
Some of the top-ranked ETFs in this sector like Technology Select Sector SPDR Fund (XLK - Free Report) , Invesco DWA Technology Momentum ETF (PTF - Free Report) , iShares Expanded Tech-Software Sector ETF (IGV - Free Report) and First Trust Technology AlphaDEX Fund (FXL - Free Report) could be excellent picks. These funds have Zacks ETF Rank #1 (Strong Buy) or 2 (Buy).
Bet on Quality ETF
Quality stocks are rich in value characteristics with healthy balance sheet, high return on capital, low volatility, elevated margins, and a track record of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term.
Among the most popular are iShares Edge MSCI USA Quality Factor ETF QUAL, Invesco S&P 500 Quality ETF (SPHQ - Free Report) and Barron's 400 ETF BFOR.
Emphasis on Smart-beta ETFs
The smart-beta strategy helps to capture market inefficiencies in a transparent way by adding extra metrics like dividends, volatility, revenues, earnings, momentum, equal-weight and other fundamental factors to the market-cap or rules-based indices. It offers the best of both active and passive strategies, providing an opportunity to increase portfolio diversification, reduce risk and enhance returns over time with low cost (read: Can Smart Beta & Factor ETFs Beat the Market?).
The space is crowded with a variety of products including the simplest equal-weighting, fundamental-weighting and volatility/momentum-based weighting methodologies. Invesco Russell MidCap Pure Growth ETF PXMG, Entrepreneur 30 Fund (ENTR - Free Report) and Invesco DWA NASDAQ Momentum ETF DWAQ are among the best performing smart beta ETFs of this year. PXMG has a Zacks ETF Rank #1.
Focus on U.S. Small Caps
Small-cap stocks are less vulnerable to international issues and tend to outperform on improving economic fundamentals given their less international exposure and higher revenues from the domestic market (read: Small-Caps Beat S&P 500 in Q1: 5 ETF Winners).
While the space is crowded with a number of top-ranked ETFs, honing in growth products could lead to higher returns.iShares Russell 2000 Growth ETF (IWO - Free Report) , Vanguard Small-Cap Growth ETF (VBK - Free Report) , iShares S&P Small-Cap 600 Growth ETF (IJT - Free Report) and SPDR S&P 600 Small Cap Growth ETF (SLYG - Free Report) are the most popular products and have a Zacks ETF Rank #1 or 2.
Overweight Dividend ETFs
Dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as 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.
In particular, ETFs with stocks having a strong history of dividend growth seem to be good picks. Vanguard Dividend Appreciation ETF (VIG - Free Report) and ProShares S&P 500 Aristocrats ETF (NOBL - Free Report) have a Zacks ETF Rank #3 (read: A Bunch of Dividend ETFs Hitting All-Time Highs).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>