History shows 'sell in May and go away' might be a good idea for S&P 500 investors, DataTrek says

• The S&P 500's historic performance shows selling US equities could be a good idea right now, DataTrek says.
• The S&P 500 has seen total returns grow by over 10% in the last two years, indicating a drop this year.
• However, DataTrek says that markets will keep rallying in 2021.

Based on the S&P 500's historic performance, the old adage "sell in May and go away" might be a good idea for investors this year, DataTrek said in a note on Wednesday.

The S&P 500 has seen total returns grow by over 10% year on year for the past two years and is currently up 10.5% year on year in 2021. Looking back through history however, there have only been five instances where year-on-year growth has exceeded 10% for three consecutive years. These have mostly been at pivotal times like the war, or the biggest bull market run on record, DataTrek said.

"Sell in May and go away" is based on historical stock performance that shows momentum in the markets generally slows down and produces lower returns over the summer months. The pattern has, however, been inconsistent in recent years.

Should what DataTrek calls "the curse of the third 10 percent year" hold true, reducing portfolio exposure to US equities might therefore be a good idea for investors right now.

"To buy or hold the S&P 500 right here, you need to believe other investors believe there's another 10 percent coming in the next 12-18 months," DataTrek co-founder Nick Colas said in the note.

The current market environment may be comparable to wartime market scenarios, but it also seems unlikely that markets will get earnings expectations wrong three years in a row due to their efficiency in valuing stocks, DataTrek said.

"We're still of the mind that earnings expectations will continue to climb, and companies will be able to beat those elevated expectations because 1) American consumers' ability and desire to spend is extremely high and 2) companies have underappreciated earnings leverage," Colas said.

"As that story continues to develop, investors will grow to believe in another +10 percent year in 2022, and 2021 will see a continued rally. That's what you have to believe to stay long the S&P 500 here; no other explanation really works," he said.

On Wednesday morning, S&P 500 futures were down 0.4% after a broad equities sell-off hit markets earlier in the week as investors continue to worry about inflation and nervously await consumer price index data due to be released on Wednesday.

Despite the drop, stocks are still trading at record highs that were reached earlier this month.

Various major banks have also been hesitant to recommend the "sell in May and go away" strategy. JPMorgan's quant guru Marko Kolanovic instead suggested to "buy in May and go away," arguing the economic reopening would overpower the historical idea that markets slump over the summer.

"If you are tempted to reduce US equity exposure right here, right now, history is certainly on your side," DataTrek's Colas said.