June Gloom Doesn't Mean Doom

There's an old adage about the stock market that everyone seems to be quoting right now: “Sell in May, and go away.” But that's not exactly good advice.

First, tech stocks typically do well in June. Since 1971, the Nasdaq Composite Index has risen an average of 0.7% for the month. Second, stocks generally behave differently in a pre-election year. Since 1971, the S&P 500 has averaged a 0.03% decline in June. But in the years prior to presidential election years, it has averaged a 1.4% gain.



Of course, past performance doesn't forecast future performance. And this June certainly has the potential to be disappointing. We expect more volatility and could see a significant sell-off, with a number of events posing a threat to the stock market. A market drop could be set off by investors' realization that the Federal Reserve may begin liftoff sooner than they expected.

We have long worried about the mismatch between market expectations and our own view of when the Fed would start hiking rates. For example, a strong jobs report on Friday could be a catalyst. We expect non-farm payrolls to come in well above 200,000 jobs.

More importantly, we should see improvement in wage growth. One indication of higher wages comes from the Richmond Fed's manufacturing index. While price readings for May were generally flat, wages actually rose 11 percentage points.

But wage growth isn't experiencing strength in all regions. Just look at the disappointing manufacturing data from the Dallas Fed, which shows that lower energy prices are taking their toll on the region. While wages and benefits remain solidly in positive territory in Texas, they've fallen in the past month.

However, despite some regional weakness, we could see enough overall wage growth and job improvement in the May jobs report. As a result, investors may begin to worry that the Fed will act sooner than they had initially thought.

Meanwhile, another event that could cause a selloff is a “Grexit.” In the past few days, International Monetary Fund chief Christine Lagarde has acknowledged the possibility that Greece could exit the European Monetary Union. That suggests the probability of such a move has increased.

While some market observers may argue that a Grexit is already priced into the stock market, others say these events get priced into the market twice—once on the rumor and then again when the actual event occurs. Most observers still expect a resolution, so a default by Greece would likely create a lot of volatility.

But Greece still has some breathing room, as the real deadline seems to have shifted to the end of June. At that time, Greece would lose its “program country” status if no agreement is reached. If there is a Grexit, then we expect a market selloff to ensue—but it should be relatively short-lived.

3 Reasons to Buy on the Dip

Even if this June turns out to be disappointing for equity investors, we caution against running for the exits. Investors should view any June selloff as a buying opportunity. Here's why:

So if there is a June swoon, don't despair. Use the pullback to selectively add to your equity exposure, particularly dividend-paying stocks.

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Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.