The Stock Market Is on Pace to End Lower in May. It Could Be a Good Thing.

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The stock market is down for May. If it ends the month in the red, history says to expect gains soon—and recent economic developments might support that expectation. 

The S&P 500 is down about 0.1% for May, though it was down much more a few days ago, with May officially closing out on Tuesday.

Part of the market weakness in May could have been related to the adage “sell in May and go away.” The stock market tends to perform poorly in the second full month of spring.

But also driving the downside has been that the market is getting a handle on just how much higher interest rates will cause economic growth to slow down. And the Federal Reserve is on track to raise rates several more times from here to drive down high inflation. That inflation is also seen in companies’ costs, which is bringing profit margins lower. 

But history says to buy this dip. After the S&P 500 falls in May, historically, June sees an average move of 1.2% upward, according to Dow Jones Market Data. For the rest of the year, the index averages a 3.4% increase. 

That is consistent with recent developments that support the potential for gains from here. For the moment, the Fed doesn’t seem to be getting any more aggressive on rate hikes. The central bank implied on its minutes released this past week that an economic slowdown would prompt it to slow down the pace of rate increases later in the year.

Friday, inflation data showed that price increases are slowing down, another feather in the cap for those that say the Fed will become less aggressive. 

Already, the stock market has begun to show some signs of life.

The S&P 500 has risen 8% from its intraday low for the year, hit Friday, May 20. The index has already started to rise to key levels that show it is bucking its recent downtrend.

To be sure, the market isn’t out of the woods yet. The S&P 500 is still down double digits in percentage terms for the year and there are more key levels it needs to hit before it becomes clear that market participants are getting more confident. 

At the very least, it’s looking like there won’t be a June swoon. 

Write to Jacob Sonenshine at [email protected]