May is known as the start of the worst six-month stretch for stocks, a fact that prompts Wall Street each year to drum up the old adage “Sell in May and go away.”
But despite one big dip sparked by President Trump’s political troubles, the Dow Jones industrial average eked out a small gain of 0.3 percent last month, setting the market up for fresh challenges.
June, it turns out, has also been a historically poor month for the Dow, ranking 11th of the year’s 12 months and posting an average loss of 0.3% since 1950, according to The Stock Trader’s Almanac.
And June swoons have become more common. Last year, the Dow suffered a two-day 870-point drop following the June 23 Brexit vote, and got hit with big declines in June 2015 during the Greek debt crisis. The month also saw eight days of losses of 100 points or more in 2013, when Wall Street got hints the Federal Reserve was planning to pare back its economic stimulus.
So what’s next for stocks this June?
The general consensus is that there is nothing out there at the moment — aside from some unexpected shock — that could cause a steep drop in prices. However, there are also enough obstacles to keep the market from zooming higher.
“We don’t see anything that really concerns us,” said Bill Hornbarger, chief investment officer at Moneta Group. He expects an “uninspiring market.”
The plusses and minuses, market pros said, could balance each other out.
* An expected second-quarter rebound in U.S. economic growth in the 2%-2.5% range, or roughly double the 1.2% growth in the first three months of the year.
* Corporate earnings, which grew 15.4% in the first quarter, are expected to remain strong.
* The job market for Americans and the confidence level of consumers also remain upbeat.
* The biggest, perhaps, is that the U.S. stock market is trading at nearly 18 times its expected earnings for the next four quarters, which is 20% more expensive than its longer-term average, according to earnings-tracker Thomson Reuters.
* Stocks must also overcome an expected interest rate hike from the Fed in mid-June, which will increase a key borrowing cost by a quarter-percentage point to a range of 1%-1.25%. Low borrowing costs, which stimulate economic activity, have been a key driver of the stock rally.
* Political controversies surrounding President Trump and further delays in his economic agenda, including a hefty tax cut plan, could also be negative for stocks.
Sean Lynch, co-head of global equity strategy at Wells Fargo Investment Institute, said the Dow, which is up 6.5% in 2017, has gotten ahead of itself and may trade sideways or even lower this summer.
“I don’t see the recipe for a 10% correction (or price drop), because U.S. (business conditions) are too strong and first-quarter earnings season was better than expected,” Lynch said. “But valuation is a little bit stretched, which could limit the market’s upside.”
What he wants to see is a continuation of the strong profit numbers in the second quarter, which ends June 30, and proof the U.S. economy bounced back from its slow start to the year.
“It’s important,” Lynch said, “that we do see a bounce back in second-quarter growth and another round of strong earnings to confirm the above-expectation first-quarter numbers.”