Will This May Day Be a Celebration… or a Distress Signal?

Wednesday is May 1… and you know what that means.

A lot actually.

It’s May Day, which is everything from an ancient festival celebrating the return of spring to a commemoration of gains made by workers in the labor movement.

If you spell it as one word – “Mayday!” – it’s a distress call over a radio in a life-threatening emergency.

Here in 2024, it’s also the day the Federal Reserve will announce its next decision on interest rates.

It’s a day when nearly 300 companies will report earnings, according to the TradeSmith market calendar.

And if you follow the clever but not advisable market axiom, it’s your cue to “sell in May and go away.”

Let’s start with that last one…

Don’t Sell In May

If you invest in the highest quality stocks to begin with – those with the best fundamentals, strong technicals, and Big Money flowing in – you’re likely to do yourself more harm than good by selling and hiding for six months.

I dug into FactSet data and compiled the average returns by month for the Dow, S&P 500, Nasdaq Composite, and Russell 2000 small-cap index (RUT). And yes, there’s some seasonal weakness in there, but the most volatile month is clearly September.

My research firm dug deeper into the data and found out, even more convincingly, how that can be a mistake. In fact, this time we’re in right now – from April 20 to May 20 – is indeed historically weak. But then, profits typically return from May 20 through the end of July.

And if you’re willing to hang on through August and September volatility – and even use it to your advantage by investing in good stocks at cheaper prices – you do even better through the end of the year.

We Know Rate Cuts Are Coming

Wednesday is the next “all eyes on the Fed” day.

Will it be a celebration or a distress signal?

I honestly don’t expect much of either, though big short-term swings are always possible on Fed days.

We can be as close to certain as possible that the Fed will not change interest rate policy. According to CME FedWatch, investors see a 97.3% probability that rates will stay the same.

Source: CME

I’m not sure who those 2.7% are that think the Fed will cut rates, but we could see a whopper of a day if they’re right.

Most of the attention will be on the policy statement, the so-called “dot plot” that reflects the thinking of members for rates in the future, and Chair Jerome Powell’s press conference.

I have no doubt some investors will hit the buy or sell button as soon as the statement is released or they got those breaking news alerts. But unless the data has changed significantly, we pretty much know what Powell will say…

Inflation remains persistent. The Fed continues to monitor the data, and they will react accordingly at future meetings.

We know interest rate cuts are coming. We just don’t know yet exactly when or how many there will be here in 2024. But as the massive rally from the end of October to the end of March showed, there’s a lot of money to be made without rate cuts, so there’s no use waiting for that all-clear signal.

Besides, the prospect of lower rates still provides a generally rosy backdrop, as do corporate earnings.

As Expected, Earnings Are Working

You don’t have to be much of a Nostradamus to see into the future when it comes to earnings. The data is highly compelling, and it almost always plays out the way it’s supposed to.

Over the last 10 years, 74% of S&P 500 companies beat analysts’ earnings estimates and 64% topped revenue estimates.

And where are we today?

With nearly half of S&P 500 companies reporting (46% to be exact), 77% beat earnings estimates and 60% beat sales estimates.

Right on track.

Before earnings season started, I wrote here in Power Trends that, based on history, I expected somewhere around 79% of companies to exceed earnings expectations and 67% to beat sales estimates. The first half of the results are just below that, but I still think we’ll be pretty close.

And that’s a good thing, because earnings are what ultimately move stocks.

Better Than Good

The winds may blow this week with all the headlines.

The 1,006 companies on the calendar to report earnings may bring out the buyers, the sellers, or a combination of both.

Same with the Federal Reserve on Wednesday.

Either way, seasonal volatility is here right on schedule, according to my data.

That same data also shows that we will come out of it just fine – better than fine, actually.

In the end, you can come out way ahead by owning great stocks. Look for the Quantum Edge trifecta of best-in-market fundamentals, strong technicals, and Big Money inflows. You could also say a healthy and growing business, market leadership, and institutional support.

My Quantum Edge system provides an overall Quantum Score for each stock that incorporates those three critical factors in picking winning investments. It also provides a Fundamental Score, a subset of the Quantum Score, which is where sales and earnings growth are analyzed and ranked.

As an example, the 20 stocks in our TradeSmith Investment Report portfolio average an outstanding Fundamental Score of 74.1. Add in the technicals and Big Money inflows and you have the stocks with the highest probability of making you good money – even when many others continue to wait for the Fed go ahead.

I’ll also be adding a new recommendation later this week in our May issue.

If you’d like to be notified when I release it, click here to learn how you can join today.

Talk soon,

Jason Bodner
Editor, Jason Bodner’s Power Trends