After wrapping up the worst month of 2024, Wall Street regained momentum at the start of May on the back of solid corporate earnings, especially that of Apple (AAPL), and renewed bets for Fed rate cuts. The Dow Jones and the S&P 500 indices climbed 1.1% and 0.5%, respectively, while the Nasdaq Composite Index increased 1.4%. Meanwhile, Treasury yields wrapped up the week with the biggest weekly drop in at least three months.

Will the rebound continue for the rest of the month, given the weak seasonal trends? This is especially true given the adage “Sell in May and Go Away,” which says investors should sell their stocks in May and re-enter the market in November to capitalize on the historically strong performance of equities between November and April. "Sell in May and Go Away" is a popular Wall Street adage, denoting traditional market underperformance during summer months (May to October).

What’s in Store?

The latest bouts of data showed signs of a slowdown in the economy. The United States added a lower-than-expected 175,000 jobs last month, and the unemployment rate unexpectedly jumped to 3.9%. After growing for fifteen consecutive months, U.S. service sector activity unexpectedly contracted in April. Consumer confidence also fell last month to the lowest since mid-2022.

The world's biggest economy had a weak start to the year due to lower consumer and government spending amid growing inflation. The economy expanded at the slowest pace in two years, with GDP rising 1.6% annually in the first quarter, reflecting a clear slowdown from the 3.4% increase in the fourth quarter of 2023 and much lower than the 4.9% increase reported in the year-ago quarter (read: GDP Growth Slows in Q1: 5 ETFs to Invest In).

While the weak data has pushed up bets for sooner-than-expected rate cuts lately, the Fed signaled that its fight against inflation will continue for a longer period, setting the stage for a period of extended higher rates. In its latest meeting, the Fed kept interest rates steady at a 23-year high in the range of 5.25% to 5.5%, citing a “lack of further progress” on inflation. Powell reiterated that it will now take longer than expected for the Fed to reach the confidence that inflation is moving sustainably down to 2%. This indicates that rate cuts are not in the cards anytime soon.

To make things worse, this is a presidential election year in the United States. Volatility and uncertainty will increase as the election day approaches. However, according to Carson Group data going back to 1950, stocks have historically rallied during the summer in presidential election years. The S&P 500 rose 2.3% on average during the May to October period during election years and was higher 77.8% of the time. Per Schaeffer’s research, the S&P’s average six-month return leading up to a Presidential election in early November is 4.67%, which compares to 2.14% in non-election years, and 0.95% in mid-term election years.

The tensions in the Middle East have also intensified in recent months, heightening fears of a wider conflict in the volatile region.

As such, investors might consider several investment strategies to navigate the May-October period more effectively that could lead to a winning portfolio.

Sector Rotation

Rotating the investments into sectors that historically performed well during the May-October period, such as consumer staples, utilities, and healthcare, could be beneficial. The S&P 500’s consumer staples and health care sectors have climbed 4.1% on average during the hotter months since 1990, outperforming the broader market’s 2.1% advance, according to CFRA Research (read: Beyond "Big Six:" Why Choose Non-Cyclical Sector ETFs?).

Investors seeking concentrated exposure to the particular sector could find Vanguard Health Care ETF VHT, Global X U.S. Infrastructure Development ETF PAVE and Consumer Staples Select Sector SPDR ETF XLP intriguing. These funds have a Zacks ETF Rank #1 (Strong Buy), #2 (Buy) and #3 (Hold) , respectively.

Dividend Investing

Focusing on dividend-paying stocks can provide a steady income stream and help mitigate potential losses during weaker market periods. These stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

In particular, high-quality dividend stocks with a history of consistent dividend payments and growth can offer both income and the potential for capital appreciation over the long term. Vanguard Dividend Appreciation ETF VIG and iShares Core Dividend Growth ETF DGRO, having a Zacks ETF Rank #1 each, fits well in this category (read:Rate Cut or No Rate Cut, Dividend ETFs You Should Buy).

Low-Volatility Focus

Investing in low-volatility stocks can help reduce the overall risk in the portfolio during the May-October period. Low-volatility stocks tend to exhibit smaller price fluctuations and have more stable returns compared to the broader market. ETFs like iShares Edge MSCI Min Vol USA ETF USMV and Invesco S&P 500 Low Volatility ETF SPLV that focus on low-volatility stocks can provide an easy way to implement this strategy. These have a Zacks ETF Rank #3 each.

Value Addition

Value investing is an investment strategy that focuses on purchasing stocks that are undervalued relative to their intrinsic value. Value stocks seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts. These are less susceptible to the trending markets and their dividend payouts offer safety in times of market turbulence.

Given this, Vanguard Value ETF VTV, iShares Russell 1000 Value ETF IWD, and Vanguard Mega Cap Value ETF MGV, having a Zacks ETF Rank #1 or #2, could be excellent picks (read: Top-Ranked Value ETFs to Buy Amid Uncertainty Around Rate Cut).

Quality Bet

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. Among the most popular quality ETFs are iShares Edge MSCI USA Quality Factor ETF QUAL and Invesco S&P 500 Quality ETF SPHQ.

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Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports

Vanguard Health Care ETF (VHT): ETF Research Reports

Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports

Vanguard Value ETF (VTV): ETF Research Reports

iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports

Invesco S&P 500 Quality ETF (SPHQ): ETF Research Reports

iShares MSCI USA Min Vol Factor ETF (USMV): ETF Research Reports

iShares Russell 1000 Value ETF (IWD): ETF Research Reports

Invesco S&P 500 Low Volatility ETF (SPLV): ETF Research Reports

iShares Core Dividend Growth ETF (DGRO): ETF Research Reports

Vanguard Mega Cap Value ETF (MGV): ETF Research Reports

Global X U.S. Infrastructure Development ETF (PAVE): ETF Research Reports

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