Will Stock Markets Recover or Should You "Sell in May and Go Away"?

Mohit Oberoi, CFA - Author
By

May 16 2022, Published 8:37 a.m. ET

In 2022, U.S. stock markets have had the worst start to the year in many decades. While stocks recovered smartly towards the end of the last week, futures point to a lower opening on May 16.

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Historically, May hasn’t been a good month for stock markets, which is exemplified by the saying “sell in May and go away.” We are now midway into the month and the Nasdaq 100 is down 7 percent while the S&P 500 has lost 2.6 percent. Will U.S. stock markets recover or is it still wise to sell in May?

Why are stock markets falling?

2022 was always going to be a tough year for U.S. stocks and even the most bullish analysts forecasted single-digit returns from the S&P 500. While market valuations were higher than the historical average, the Fed looked set for interest rate hikes.

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Historically low interest rates supported the valuation multiple expansion for U.S. stocks between 2020 and 2021. As U.S. inflation continued to rise, the Fed decided to front-load the rate hikes and we’ve seen 75 basis point rate hikes so far in 2022.

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If the macroeconomic picture wasn’t scary enough, Russian President Vladimir Putin’s invasion of Ukraine has only added to the gloom. The steep rise in energy and food prices has raised fears of stagflation. The U.S. economy contracted in the first quarter of 2022 and if it contracts again in the current quarter, we’ll technically be in a recession.

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Will the stock markets recover in May 2022?

The probability of U.S stock markets recovering in May looks low. The geopolitical situation might get worse before it gets better. With Finland and Sweden set to apply for a NATO membership, markets await Putin’s next move. Also, there are visible signs of a slowdown in the U.S. economy.

Layoffs have been mounting at U.S. companies.

Several big U.S. companies have either announced layoffs or are going slow on hiring. This includes big names like Wells Fargo, which has trimmed its workforce in its mortgage division. Among tech companies, Netflix has announced layoffs. Peloton has also announced layoffs, and so has Carvana. Uber and Facebook are also going slow on hiring.

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U.S. stock market valuations have come down.

Amid the fall in markets, the valuations have also come down. According to the data from FactSet, the S&P 500 trades at an NTM PE multiple of 16.6x, which is below the 10-year average of 16.9x. U.S. stock markets traded above historical multiples for the last few years. However, valuations have now come down amid the Fed’s rate hikes.

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U.S. stocks could recover in the second half of 2022.

The near-term outlook for stock markets looks a bit cloudy amid the noise over rate hikes, high inflation, the economic slowdown, and geopolitical tensions. However, markets should recover towards the end of 2022 unless the Russia-Ukraine war gets worse or Putin makes any other misadventure.

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Inflation should gradually come down as commodity prices soften. The aggressive tightening by the Fed will also help tone down the price rise.

Incidentally, Berkshire Hathaway chairman Warren Buffett, who had been sitting on the sidelines for a few years, has finally opened the company’s cash coffers and invested massively in the first quarter of 2022.

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There has been a tech stock sell-off.

There has been a terrible selloff in growth stocks, especially the stay-at-home winners. However, some of the stocks look attractive to long-term investors. Among mature tech companies, Apple, Alphabet, and Meta Platforms look like names worth betting on now. Apple happens to be the largest holding for Berkshire and the conglomerate scooped more shares in the first quarter after a gap of more than three years.

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