History shows this is a time when stock markets can slow down

of S&P500 Stocks are trending higher as we head into 2024. Through the first three months of this year, the composite index is already up about 10% and continues to reach record levels. Inflation isn’t coming down fast enough for the Fed, and markets remain hot even as analysts reduce their expectations for rate cuts this year.

But could a cooling-off period come soon? Based on what has happened in the past, that’s a distinct possibility. Here we take a look at when an economic slowdown occurs and what it means for investors.

Is it possible that stock prices will start to decline next month?

One of the popular sayings on Wall Street is that investors should “sell in May and walk away.” Based on the data, there appears to be some truth to this. Historical data for the S&P 500 shows the average returns produced by the index during three main periods: before May, from May to October, and after October. These average returns are based on the past 50 years.

Data by Google Finance. Calculations by the author.

The stock market appears to be seasonal, with warmer weather discouraging investors from buying. The S&P 500 generally performs better in the first and second half of the year.

Does that mean I should sell it in May?

Timing the market has been and continues to be a risky strategy. Although data from the past 50 years suggests that returns are higher at other times of the year, this is not always the case. Over the past five years, from the beginning of May to the end of October, the S&P 500 has performed as follows:

Source: Google Finance and yCharts.

While implementing this strategy could have avoided losses in 2022, it has failed to generate significant gains over the past two years. The reality is that while there is some truth to the adage of “getting out” in May, it is still a realistic strategy for investors, especially when you also consider the tax implications of holding stocks for a short period of time. does not mean.

Buy-and-hold remains the ideal strategy

Given how hot the market has been (not just this year, but also in 2023, when the S&P rose 24%), it wouldn’t be surprising to see stocks start to cool down at some point this year. But if you try to predict when that will happen and time your exit strategy accordingly, you could be missing out on potential profits.

And even if the market starts to decline later this year, over the long term S&P and growth stocks as a whole are likely to recover. No matter what the short-term outlook for the market is, staying invested is still a sound strategy.

It may be wiser to simply diversify away from stocks trading at high valuations and consider putting your money into, say, an exchange-traded fund (ETF). Vanguard Growth ETF (VUG 1.48%), giving you broad exposure to hundreds of growth stocks. That way, you can continue to invest in stocks, but with greater diversification, your exposure and overall risk will be reduced.

Over the past 10 years, the Vanguard Growth ETF has been a great investment, returning approximately 260%. This is much better than his S&P 500 performance during that period, which was his 178% return.

For long-term investors, the best option is always to hold on to the stock. As long as you can afford to continue investing in stocks with the funds you have, there is little reason to consider selling your investments just because stock prices may decline based on past trends. History tells us it’s better to stay invested regardless of short-term volatility or trends.