No Mayday for stocks as new highs loom in June

Investors who dumped their stocks heading into May may now be rethinking the wisdom of following the old Wall Street adage “sell in May and go away.”

The reason: The stock market didn’t go down as feared in May, the first month in what historically has been the worst six-month stretch for equities. Instead, all three major U.S. stock indexes posted gains, with the technology-packed Nasdaq leading the way with a gain of 3.6%. The Standard & Poor's 500 rose 1.5% just below 2100 at 2097, and the Dow Jones industrial average eked out a 0.1% gain despite an 86-point drop on the final day of May.

May’s green arrows surprised many professional investors, as stocks were confronted by the start of the weak seasonal period, a mid-month hint from the Federal Reserve that a summer interest rate hike was coming, and a lukewarm first-quarter profit season that’s just wrapping up. Add in an ongoing culprit – a market trading at above-average valuations – and the outlook heading into May was anything but upbeat.

But stocks got a lift from oil gushing above $50 per barrel for the first time since October. Fresh data on housing, jobs and orders for long-lasting goods like dishwashers also came in solid, helping to lift some of the gloom. A belief that coming quarters will be more investor friendly also acted as a tailwind for stocks and got investors talking about the market making a legitimate run at the 2015 record highs, says Bruce Bittles, chief investment strategist at R.W. Baird.

“The catalyst (for new highs) could be the likelihood that the decline in corporate earnings will trough in the second quarter and begin to grow again in the second half of the year,” Bittles told USA TODAY. ”The U.S. economy is also likely to improve in the second half led by consumer spending and later on by the belief that a change in Washington will bring along with it stimulus to assist business spending.”

But May is now in the record books. And while Bittles and other Wall Street pros won’t rule out new highs, they’re not calling for a massive breakout to the upside, either.

“I think the market can make new highs and finish the year around 2150 to 2175, but not in a straight line, says Phil Blancato, CEO and president of Ladenburg Thalmann Asset Management. “The reality is investors have to reset the expectations for what the market can do for them. This is not a 10% to 15% upside market. I don’t think the market has a lot of energy in it. Do I expect the market to roar higher? No.”

But the market does have a few things working in its favor, Blancato adds.

“ Everybody fails to realize that when (Federal Reserve Chair Janet) Yellen says the economy is doing better (and rates can be raised), that is a boon for the market, not a hindrance,” Blancato says. “Employment data remains strong. New home sales in April were strong and consumer confidence is still strong. The economy is posting modest growth. And, most important, we are coming out of an earnings recession.”

But there are still things for investors to be wary of, adds Eric Wiegand, senior portfolio manager at Private Client Reserve of U.S. Bank.

“There’s still reasons to be constructive, but we certainly wouldn’t suggest that the all-clear has sounded or the end of volatility is here,” Wiegand says.“There is still concern about central bank policy and the politically charged environment we still have to contend with.”