Wall Street is entering its best 6 months of the year. Why the stock-market rally has more room to run.

MW Wall Street is entering its best 6 months of the year. Why the stock-market rally has more room to run.

By Isabel Wang

The U.S. stock market is about to enter historically its best six months of the year, after defying the popular Wall Street adage to "sell in May and go away" with strong gains.

Yet investors are still wondering whether the blistering stock rally could run out of gas in the next few months amid rising Treasury yields and mounting concerns surrounding the upcoming presidential election.

History suggests the period from November through April is the best six-month window of the year in terms of stock-market performance. The S&P 500 SPX has scored the highest average return in that period when compared to any other rolling six-month stretch of the year dating back to 1945, according to Sam Stovall, chief investment strategist at CFRA Research.

Since World War II, the S&P 500 has delivered an average return of nearly 7% from November through April, while posting an average performance of only 2% in the remaining six-month period, according to data compiled by CFRA Research.

But this year has been different. The S&P 500 has advanced more than 16% since April 30, and is on pace for its largest May-through-October gain since 2009, according to Dow Jones Market Data. That is on top of a 20% jump in the previous November-through-April run.

"This double dose of double-digit returns has caused investors to wonder if the market has used up its energy reserves and may be headed for tough times," Stovall wrote in a Monday client note. "Not according to history, which says, but does not guarantee, that prior momentum typically served as a running start to the following November-to-April period."

After the 12 previous times since 1945 that the S&P 500 gained 10% or more in the May-October period, stocks advanced an average of 13% in the subsequent November-April period.

Moreover, there have been five times that the S&P 500 posted double-digit gains in both the November-April and May-October periods, and the large-cap index logged positive returns in four of the five subsequent November-April periods, jumping by an average of 11%. That implies that this current advance may well have further to run, Stovall said.

Not only has the November-April period been favorable for U.S. large-cap stocks, but it has also seen "significant outperformance" for the small-cap Russell 2000 RUT, MSCI EAFE EFA and MSCI Emerging Markets EEM indexes, CFRA data show.

To be sure, many investors have worried that the election jitters that have started to grip equities in recent weeks could put an end to the stock rally in the final two months of the year.

Last week, a sharp climb in Treasury yields rocked the stock market, with the selloff coming as longer-dated yields BX:TMUBMUSD30Y surged to their highest levels in nearly three months amid concerns that the incoming administration - whether that of Republican Donald Trump or Democrat Kamala Harris - could exacerbate the U.S. government's fiscal deficit.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y on Tuesday traded above 4.3% - a key technical level at which stocks have had a difficult time over the past year.

See: 10-year Treasury yield crosses 'line in the sand' that begins to spell trouble for stocks

"With stocks up 23% year to date, how much room is left for more upside?" said José Torres, senior economist at Interactive Brokers. "These 10 months have been terrific [for the S&P 500], but they are still behind the pace of many recent years - with 2023, 2021, 2019 and 2013 delivering 24%, 27%, 29%, and 30% [over the first 10 months of the year] for investors."

In order for stocks to continue their uptrend, investors need to see "a red sweep in Washington, favorable AI comments on earnings calls, tempered economic data and calmer interest rates," Torres said in emailed commentary on Tuesday.

Stovall, in a follow-up interview with MarketWatch, said the stock market will continue to climb past its "proverbial wall of worry." He said he still expects a jump in stock prices in anticipation of further interest-rate cuts and favorable economic data, to "go along with the surge in technology earnings that are expected to continue."

See: Alphabet earnings: Stock climbs as cloud growth tops estimates

U.S. stocks finished mostly higher on Tuesday, with the Nasdaq Composite COMP gaining 0.8% and scoring its 28th record close of the year. The Dow Jones Industrial Average DJIA fell 0.4%, while the S&P 500 rose 0.2%.

-Isabel Wang

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October 30, 2024 06:00 ET (10:00 GMT)

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