Many times in the past we have dealt with the question of whether the old chestnut of "sell in May and go away" is something that investors should use to guide their positioning into the summer. But, as we hit the halfway mark of the month, the market seems to be writing its own story. Instead of packing up and heading for the cottage, investors are staying put, and in many cases, doubling down. The S&P 500, TSX, and even some battered international indices are showing signs of life. So, what’s going on here? Is this a head-fake, or are the bulls back in control? Before we dive in, let’s first examine the seasonality question.

While this phrase is attached to modern stock markets, its origin stems from a practice in the old square-mile financial district of London. Back then, investors would liquidate their positions in May and head off to the countryside for a summer sojourn. Come September (around St. Leger’s Day), they would return to the cobbles and resume.  The more modern interpretation is that stocks tend to underperform during May to October, but keep in mind that underperform doesn’t necessarily mean stocks go down. It simply suggests that the performance of stocks in this period may not stand up against the months between October and May. Emphasis on the word “may”.

If we go back over say the last 75 years or so, what we find is that not only does the month of May turn out to be a bad month most of the time, but that the summers generally don’t show signs of fatigue.  In the above chart, I look at comparisons between years where we see a net gain in the S&P500 during May and what happens in the summer and those where May turns out to be not so good.  As you can see, years where we get a gain in May and then a gain from May to September, account for 42% of the period from 1951. That compares to only 19% of the time where a gain in May occurs before a net loss during the summer. When May sees a net drop in the S&P500, 24% of the period shows an actual improvement in the summer versus 15% of the time when the summer is dismal.

Bottom line, history does not support the “sell in May” proverb.  That doesn’t mean that we put the blinders on, leave the portfolio alone and head to the lake. The last time we had a situation where we saw the S&P500 rise in May, but suffer a drop over the summer was back in 2015. Then, the index notched out a 1% lift in May, but fell close to 9% by the end of September. Seven years earlier, we saw an even larger divergence, when the S&P500 rose 1.1% in May 2008, only to slide 16.7% in the summer.

That latter example is interesting given that this was the last time that this combination took place on the doorstep of a recession. While the probabilities of a U.S. recession have been marked down this week in the wake of apparent progress on the trade front, not including bonus jet gifts, there are still hovering in the 30-50% region. What’s important to note is that the correlation between equity market improvement during the first half of May and the reduced economic angst is taking place without a ton of tangible evidence. Let’s take a look at what’s fueling this rally—and what could still go off the rails.

What’s driving the rebound so far? For one, the Q1 earnings season was better than some feared. Let’s be honest—the bar was set low. Analysts entered Q2 earnings season bracing for revenue slippage and margin compression, especially among U.S. consumer and tech names. But while the mega caps didn’t all deliver fireworks, they delivered enough to reassure markets. Big Tech, in particular, proved resilient. Companies like Microsoft, Alphabet, and even Meta posted strong cloud and ad revenue growth. Meanwhile, Canadian banks held up, with loan loss provisions not spiking as feared.

In terms of the economic backdrop, even though the first quarter saw U.S. GDP contract, retail sales have since come in more buoyant than street economists called for.  The Citi Economic Surprise Index, which measures the deviation between actual economic report outcomes and market expectations, fell to below minus 20 in April, but it has edged into positive territory in late April and is hovering near minus 10. This isn’t great, but not enough of a downer to stand up to the trade and tariff optimism. There are also signs of stabilization abroad. Eurozone PMIs have bounced, and Germany appears to have skirted a deeper recession. China, while still volatile, has ramped up stimulus efforts and infrastructure spending. This global stabilization theme has helped revive appetite for cyclicals and industrials.

A not-so-small contributor to this rally is that many funds were underweight equity coming into May and there was fairly large level of short positions. Institutional portfolios were defensively positioned in April, and hedge fund net exposures were at multi-year lows. The in stocks early this month forced short covering and a reallocation back into risk – a reminder that sentiment can move markets faster than fundamentals. The above chart shows the AAII Bullish Sentiment indicator, produced by the American Association of Individual Investors.  The survey asks investors what they think will happen over the next six months and it is measured weekly. Back at the end of April, 21% of respondents felt that markets would be higher in six months, compared to 59% who saw markets declining and 20% who were neutral. As of this week, the bullish crowd has shot to 36%, the bears are down to 44% and there is still 20% in the neutral camp. Note, the VIX is back below 13, and retail call option volume is spiking again – both suggesting it’s starting to feel a little too easy again.

If the short-covering is over, is there a risk that this jump in optimism might run into a wall and the rally fades? For one, I do believe we are seeing some traditional late-cycle cracks. Despite resilience, we’re seeing cracks form: rising delinquencies in credit card and auto loans, softening temp hiring, and tighter lending standards. Small businesses in the U.S. are sounding the alarm on financing, and Canadian households are feeling the pinch from mortgage renewals.

This week, Fed Chair J. Powell stated that the U.S. might be entering a period where supply shocks become more frequent and persistent. Even though we now have a 90-day truce between the U.S. and China, there is still a 30% tariff on Chinese products and a void has grown in the shipping lanes. We coined “Trump no-nomics” with a grin a few weeks back, but there’s truth behind the label. Trump’s campaign rhetoric is full of economic policy U-turns: sweeping tariffs, promises to dismantle climate-related subsidies, and open threats toward central bank independence. Markets don’t like unpredictability, and Trump no-nomics is becoming its own source of macro risk.

Speaking of the Fed, while CPI inflation did notch lower in April to 2.3%, Powell and crew don’t appear to be in rush to restart a move lower in rates. In addition, the bond market isn’t so sure inflation is licked, as evidenced by higher long-term yields.  And the re-steepening of the yield curve is happening for the wrong reasons—long-term rates rising not from growth expectations, but from fiscal pressure and debt issuance.

So, where do we go from here? For one, we think investors need to practice balance over bravery.
We’re not going to run to the caves, but we’re not chasing every bounce either. A barbell strategy still makes sense: pair growth with defense, balance cyclicals with staples, and stay active in managing fixed income duration. Dividend payers and low-volatility strategies are back in vogue.
Tech remains dominant, but industrials have stepped up. Utilities are staging a stealth rebound. Consumer staples, especially those with pricing power, are still a defensive favourite.

Canadian energy stocks are getting attention again as WCS spreads narrow. The TSX is playing catch-up, buoyed by resource stocks and a recovering real estate sector. Europe offers select opportunities in healthcare and green infrastructure. EM remains volatile but selectively investable, particularly in India and Mexico. Regardless of what sectors might offer some opportunities, the key strategy in the coming weeks will be to keep the guardrails up. Summer headlines can shift fast. Whether it’s rate repricing, geopolitical flare-ups, or policy pivots, the second half of the year promises more noise than clarity. Staying diversified, liquid, and disciplined will matter more than ever.

So, buy in May? Maybe. Stay? That depends. The first half of May has brought more optimism than many expected. But summer has a habit of humbling complacency. We’re keeping our eyes open, our allocations thoughtful, and our humor intact. Because whether you believe in seasonal patterns or not, one thing is certain: the markets don’t take vacations—even if we wish they did.

On behalf of the Pyle Wealth Advisory team, have a wonderful long weekend.

Andrew Pyle