Advisers warn clients about 'long, difficult bear market'

With both the stock and bond markets grinding through the kind of rough patch that hasn’t been seen in decades and facing headwinds in the form of inflation and a Federal Reserve tightening cycle, the adage of "sell in May and go away" might sound tempting to some investors.

The question for financial advisers is whether it’s already too late to employ such an old-school strategy, with the S&P 500 Index down almost 13% from the start of the year and the Nasdaq Composite Index down nearly 21%.

“I know that this theme has gone through many times in the past, but I would suggest that at this moment in 2022 where the markets are in correction territory, investors may find that selling now may be selling low, and that they get whipsawed and buy in later this year,” said Scott Bishop, executive director of wealth solutions at Avidian Wealth Solutions.

“The U.S. stock markets are off to their worst four-month start to any year since 1939, and the more growth-oriented Nasdaq suffered its biggest monthly decline since the financial crisis back in 2008, largely on the back of a surge in bond yields linked to the Fed's hawkish policy turn, in my perspective,” Bishop said. “The market may go lower, but I see this as a point in time to review your investment discipline and possibly rebalance to areas you believe will recover quicker at this point in the market cycle.”

As far as following the advice to "sell in May," Paul Schatz, president of Heritage Capital, said now is not the time.

The adage “has a strong track record the further back you look,” he said. “It has worked better during first terms of presidents, like we have now, but I don’t think you can aptly manage money by cute market adages.”

Schatz believes the financial markets “will remain choppy, sloppy and frustrating for another two quarters.”

“There should be at least one 7%-to-10% rally during this period, but it will be a selling opportunity,” he added.

Some of the fuel for what's expected to be an explosive near-term market ride is coming from the Federal Reserve, which is now boxed into a position of having to aggressively raise interest rates to try and manage the pace of inflation, which is hovering near a 40-year high.

“The Federal Reserve is in a tough spot right now as it navigates elevated risks of a recession,” said John Leer, chief economist at Morning Consult.

“They want to raise rates high enough and fast enough to curb inflation, but they don’t want to tip the economy into a recession. It’s a delicate balancing act that’s sure to test Fed policy,” Manning said. “To some extent, markets have already priced in May's rate increase, and consumers are already starting to feel the impact in the form of rising interest rates for home and auto loans. Looking ahead, markets still have a lot of new information to process in the coming days.”

Lindsey Bell, chief markets and money strategist at Ally Invest, said that the stock market has “priced in an aggressive path forward for interest rate increases” and that “no one will be surprised if the Fed raises rates 50 basis points” this week.

But even if the pace and degree of rate hikes over the next few months can be factored in, Bell said the stock market “will be pleased to have this event in the past.”

“Ultimately, a sigh of relief may be released this week, but uncertainty will likely continue to haunt investors in the near term,” she added.

Dennis Nolte, vice president of Seacoast Investment Services, said that not only is the present the wrong time to sell out of the current market, but the traditional reentry point in early fall will also be a moving target.

“We think the next couple of months are going to be rough,” he said. “And we think the second half of the year is much more positive looking than the first half ends up. But that is all subject to change and revision, as there are a lot of factors that are moving sentiment. Check your risk tolerance, for real. It's never too late to adjust your portfolio.”

Ed Butowsky, managing partner at Chapwood Investments, is equally wary of the current economic environment.

“Sell in May and go away should have been ‘sell in March and keep on marching,’” Butowsky said. “The market is selling at a [price/earning to growth ratio] of 1.8, and anything over 1 is considered pricey. Be ready for a long, difficult bear market.”

With the broad stock market indexes already nestled into correction territory, Jon Ulin of Ulin & Co. Wealth Management said any drastic portfolio moves would amount to unsophisticated market timing and panic selling.

“it’s not too late to sell in May if your crystal ball foresees a catastrophic financial crash and resulting crisis like in 2001 or 2008,” Ulin said. “If, instead, you are a disciplined long-term investor, the rough start to 2022 may be a good wake-up call and time to test and review how your portfolio held up, while making any necessary adjustments to your diversification strategy.”