If you sold stocks in May and went away, consider yourself a winner. Will June be any better for the market?
May has been a brutal month for the major indexes. The S&P 500 (.SPX) has dropped 5.3% through May 30, its first May decline since 2012, when it dropped 6.3%. The Dow Jones Industrial Average (.DJI), meanwhile, has fallen 5.4%, while the Nasdaq Composite (.IXIC) has slumped 6.5%.
After four months of gains that saw the S&P 500 gain 17.5% to start the year, the stock market was due for a pullback. But the market needed a catalyst—and it got one when President Donald Trump tweeted that he would raise tariffs on Chinese goods, just when everyone was counting on a deal getting done. By the end of the month, fears of a slowing economy and an inverted yield curve were added to the mix, and we were all ready for May just to go away.
None of those issues look like they’ll fade in June, but that doesn’t mean the market has to keep falling. This was just the 14th time since 1979 that the S&P 500 dropped in May, and the index has bounced back in June in 8 of them, for an average gain of 0.6%. The average gains are even bigger if we consider only May drops of 2% or more. In those eight cases, the S&P 500 averaged a 1.2% rise in June.
And new catalysts have the potential to emerge. There is an FOMC meeting in June, and that means the Federal Reserve could say—or do—something to convince investors that it still has the market’s back. And then there’s the G-20 meeting at the end of the month, where Trump and China’s Xi Jinping could meet and potentially get trade talks back on the right path.
The good news is that, barring a recession, much of the bad news is already reflected in the S&P 500. It now trades at 15.9 times 12-month estimated earnings, down from 17 times near the end of April. Other sectors, particularly those exposed to the trade war, have had their valuations cut even more: The S&P 500 Semiconductor & Semiconductor Equipment Industry index (.GSPSEQP) dropped from a peak of 15.5 in mid-April to just 12.8 on May 30.
Of course, we could have said the same thing back in October, when the S&P 500 dropped 6.9%—followed by a down November, and an even worse December.
Let’s hope history doesn’t repeat.
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