History Says This Is When the Stock Market Might Slow Down

The S&P 500 has been on a tear to start 2024. Through the first three months of the year, the broad index is already up around 10% as it continues to hit record levels. Even though inflation isn't coming down fast enough for the Fed, and analysts are scaling back their expectations for rate cuts this year, the market remains red hot.

But could a cooling-off period be coming soon? That's a distinct possibility, based on what's happened in the past. Here's a look at when a slowdown might occur, and what it might mean for investors.

Could stocks start to stumble next month?

One of the popular sayings on Wall Street is that investors should "sell in May and go away." And based on the data, there does appear to be some truth to that. Historical data for the S&P 500 shows the average returns the index has generated during three main intervals: before May, from May to October, and after October. These average returns are based on the past 50 years:

Data per Google Finance. Calculations by author.

There does appear to be some seasonality in the stock market, with warmer weather appearing to lure investors away from buying; the S&P 500 generally performs better in the earlier and latter parts of the year.

Does this mean you should sell in May?

Timing the market is and always will be a risky strategy. While the data over the past 50 years does suggest there are better returns to be made at other times during the year, that doesn't mean it will always be the case. Here's how the S&P 500 has performed during the past five years, between the start of May and the end of October:

Source: Google Finance and yCharts.

By deploying this strategy, you could have avoided losses in 2022 but missed out on some great gains in the previous two years. The reality is that while there is some truth to the adage of "going away" in May, that doesn't mean that it's a practical strategy for investors, especially when also factoring in the tax consequences of holding stocks for short periods.

Buying and holding is still the ideal strategy

Given how hot the markets have been (not just this year but in 2023 as well when the S&P rallied by 24%), it wouldn't be surprising to see stocks start to cool off at some point this year. But trying to predict when that will happen and time your exit strategy accordingly could mean you miss out on potential gains by doing so.

And even if the markets do start to stumble later this year, in the long run, the S&P and growth stocks as a whole are likely to recover. Remaining invested is still a sound strategy, regardless of what the short-term outlook is for the market.

It might simply be more prudent to diversify away from stocks trading at high valuations and perhaps consider putting money into an exchange-traded fund (ETF) such as the Vanguard Growth ETF (VUG 0.33%), which will give you broad exposure into hundreds of growth stocks. That way, you can remain invested in stocks, but your exposure and overall risk will be reduced by being more diversified.

Over the past decade, the Vanguard Growth ETF has been a great investment, achieving gains of around 260%, which is far better than the S&P 500's performance during that stretch with its 178% returns.

For long-term investors, the best option is always to remain in stocks. As long as you can afford to keep invested with the money you have in stocks, then there's little reason to consider selling your investments simply because there's a chance that stocks could decline based on a historical trend. History says you're better off staying invested, regardless of short-term volatility and trends.