Should we pay attention to seasonality (sell in May) in this year’s market?

Written by:  Mutsumi Kagawa (Chief Global Strategist, Economic Research Institute of Rakuten Securities)



1. The year-to-date changes in the domestic and overseas markets stood out.

In the Tokyo market this week, the Nikkei Stock Average reached its 33-year high again on May 30. In the US market, the S&P 500 Index and the Nasdaq 100 Index hit new year-to-date highs. Chart 1 is a list of “periodic change” for major stock indices in US, Europe, Japan and global. Especially when comparing the “year-to-date change”, the Nikkei average is +18.4% and the annualized rate is +44% (=18.4% ÷ 5 × 12), showing strong growth. Whereas the Nasdaq 100 index in the US market has increased by 30.3% since the beginning of the year, and the annualized rate is +73% (=30.3% ÷ 5 × 12), which is even stronger (May 31). The Japanese stocks are recovering because foreign investors continue net buying due to undervaluation as compared to the global markets, expectations for management transformation and premium redemption to shareholders, and stable business sentiment mainly on domestic demand. Besides, the effects of external factors such as strong US stocks, centered on NASDAQ, and the depreciation of the yen cannot be overlooked. Regarding the “debt ceiling problem” that has weighed on US stocks, President Biden, and Speaker of the House McCarthy (Republican) said last weekend that they would basically agree to “temporarily suspend the public debt ceiling until January 2025 (subject to fiscal spending restraints)”. Thus, the risk aversion has receded slightly. The bill (the Fiscal Responsibility Act) was passed by the House of Representatives on the May 31, and there was a sense of relief in the market (June 1, Japan time).



2. Nasdaq 100 implicates “half-price return is full price return.”

In the US market, the strength of the Nasdaq 100 index stands out. Chart 2 shows the trends of the Nasdaq 100 Index and S&P 500 Index starting in the beginning of 2021. The Nasdaq 100 has fallen about 35% from its all-time high (close) on November 19, 2021, to its low on Dec. 28, 2022. However, more than half of the decline has been recovered at present, and it is at a level that creates an expectation of “half-price return is a full-price return” (May 31). There is a market saying that “half-price return is full-price return,” which means that stocks and stock indices that have returned to half of their decline have a strong upward (recovery) momentum and are likely to return to their original highs. I would expect the Nasdaq 100 Index, which has recovered by more than 50%, to fully recover in the future. In particular, the stock prices of high-ranking stocks by market capitalization, which are called “The Magnificent Seven” in US market and referred to as the “Big Seven” in this article, are showing strong stock prices. GAFAM (Apple, Microsoft, Alphabet, and Meta Platforms), which makes up the Big Seven, plus Nvidia and Tesla, have risen since the beginning of the year, and has outperformed the year-to-date increases of the S&P 500 (market average) as well as the Nasdaq 100. Among them, Nvidia, the largest semiconductor company in US, has risen 174% since the beginning of the year to a new high since listing. Its market capitalization temporarily reached 1 trillion dollars (about 140 trillion yen) and attracted a lot of attention (May 30). It is the seventh US company, after GAFAM and Tesla, to reach a market capitalization of $1 trillion, and the first semiconductor company to do so. While attempts toward artificial intelligence (AI), which automatically creates text and images, are expanding worldwide, financial results and guidance (earnings forecast) announced by NVIDIA which holds about 80% of the market share in semiconductors for AI last week exceeded market expectations, hence the stock price soared. The Nasdaq’s strength so far in 2023 can be called an “AI rally” driven by expectations for innovation.



3. Will the market repeat “sell in May” this year?

On the other hand, there is also the view that positive factors will be priced into the market until May, and that the stock price will temporarily adjust after June. This is a seasonality (anomaly) symbolized by the market saying, “Sell in May and go away. Chart 3 shows the average trends in US stocks (NY Dow Jones Industrial Average) and Japanese stocks (Nikkei Stock Average) over the 30-year period from 1993 to 2022, showing the trajectories that followed from the beginning of the year. Based on long-term market performance, there is a trend that “US stocks tend to become unstable after rising until May. After bottoming out around autumn, they hit new highs for the year toward the end of the year (as evidenced by the year-end high)." understand. Of course, it is not an event that will always be repeated every year and does not guarantee future investment results. However, it may be safe to regard market seasonality as  shared by market participants and algorithms around the world. Seasonality, known as a quantitative trend, has no clear basis (hence refer as anomaly). The prevailing theory is that this is the time for mutual funds and hedge funds to reduce their holdings of stocks for the purpose of accounting and tax saving. Some say it’s just a “rule of thumb”. However, it would not be surprising if the stock market, which has continued without any major corrections this year, hits a lull (stock prices drop and daily adjustment) in June after hitting a high in May. Rather, a market that incorporates autonomous adjustments as appropriate may be healthier and last longer. The factors that may potentially cause stock price to fall in the near term include: (1) Expectations for additional interest rate hikes at the FOMC (Federal Open Market Committee) in June and rising bond rates, (2) Growing expectations of a recession caused by financial instability and credit crunch, (3) Credit rating downgrade risk of US Treasuries by rating agencies following the US Debt ceiling problem, etc. In short, I would like to keep the stance of “long-term investment” and pay attention to the short-term volatility of the market.




Name: Mutsumi Kagawa
Title: Chief Global Strategist
Organization: Rakuten Securities Economic Research Institute
Bio: Mutsumi Kagawa has an extensive background in the field of finance. In 1989, he began his career as a fund manager and investment researcher at various institutions, including Nikko Securities Investment Trust (Nikko Asset Management), Citibank, and Tokai Tokyo Research Center. With his experience working in the United States, Kagawa brings a global perspective that is highly regarded in his current role as the Chief Global Strategist at the Rakuten Securities Economic Research Institute.