Debt Ceiling Debate Doesn't Mean 'Sell in May and Go Away'

From high-profile earnings to the latest FOMC decision to the ongoing debt ceiling debate, don't expect anything to go away in May.

If you were looking for a quieter month of May, consider skipping the first few weeks. 

All About Earnings 

After weeks of high-profile tech and bank earnings, to quote the Carpenters, "we've only just begun." 

As of the end of April, 79% of S&P 500 companies exceeded the street's earnings expectations and 74% of S&P reports saw revenue surprise on the upside, according to FactSet. And so far, the market has taken earnings in stride with the S&P 500 marking a 1% gain in April and a 9% gain year to date. 

DON'T MISS: 5 Key Earnings Season Takeaways for Tech Investors

"We came into earnings season with the masses mostly bearish and, like I had mentioned before, a lot of people have already acted on those opinions-- so the market was positioned for lower prices and a weak earnings season. But what we're getting is not necessarily a weak earnings season. It's not great, but it's not a disaster. And sometimes, if everybody's positioned on one side, that's really all it takes," futures and commodities broker Carley Garner told Action Alerts PLUS Friday. 

But can the momentum continue? 

This week alone, Wall Street will digest earnings from Advanced Micro Devices  (AMD) - Get Free Report, Ford  (F) - Get Free Report, Starbucks  (SBUX) - Get Free Report, Uber  (UBER) - Get Free Report and Apple  (AAPL) - Get Free Report. 

Later in the month, investors will get a more direct look at the state of the consumer when retailers including Target  (TGT) - Get Free Report, Home Depot  (HD) - Get Free Report, Lowe's  (LOW) - Get Free Report and Walmart  (WMT) - Get Free Report join the earnings onslaught. 

Fed Watch 

All eyes and market algorithms turn to the Federal Reserve as the central bank meets on May 2 and May 3 with a decision from the FOMC and a subsequent press conference from Fed Chair Jerome Powell. The Fed is largely expected to raise interest rates by 25 basis points, but amid the collapse of First Republic Bank and its subsequent seizure and sale to JPMorgan Chase, investors will closely follow any commentary on the state of the economy amid the Fed's ongoing crusade against inflation. 

DON'T MISS: First Republic Sold to JPMorgan in Latest U.S. Bank Collapse

"The big question will be whether or not the Fed indicates it is ready to halt rate hikes and wait to see if the lag effect of its policy is working. The market currently sees a 28% chance of another quarter-point hike on June 14. Just one month ago, the odds were zero, however, there are some signs that inflation is holding up in various areas and that the Fed is still concerned," James 'Rev Shark' Deporre wrote on Real Money.

And unfortunately, the economic check-in doesn't end with the Fed. On the economic data front, investors await the monthly jobs report on Friday and further inflationary data points in the week to come with the monthly releases of the consumer price index (May 10) and the personal expenditures price index (May 26).

Political Elephant in the Room

And of course, while you're wondering how you'll pay this month's credit card bill, many in Congress are asking the same question about the nation. The Treasury Department has warned the U.S. could fail to meet its financial obligations if a deal to raise the $31.4 trillion debt ceiling isn't reached by June 1, a deadline which has been pushed forward by Treasury Secretary Janet Yellen. The nonpartisan Congressional Budget Office, however, has said that moment is more likely to occur between July and September. 

As a refresher, the debt limit refers only to the amount of money the U.S. government may borrow to meet its current debt obligations. It in no way, authorizes new spending. 

The Republican-led House of Representatives has passed a debt ceiling bill that would raise the ceiling through 2024 and cap 2024 federal discretionary spending at 2022 levels. The bill also includes cuts to several priorities of the Biden administration. 

Republican Speaker Kevin McCarthy has reportedly accepted an invitation from President Biden to discuss the debt ceiling with other congressional leaders on May 9, according to reporting from CNN. Biden has reportedly said lifting the debt ceiling cannot be used as a negotiation tactic and has not met with McCarthy since a meeting in February. 

 Meanwhile, Senate majority leader Chuck Schumer has announced hearings to “expose the true impact” of the GOP debt ceiling bill. 

When asked how concerned Action Alerts PLUS club members should be about a potential default, portfolio manager Chris Versace said the issue is one to watch, but a resolution is more than likely. 

"We've been around this a number of times...Where it really counts, when it really counts, down at the wire, will we get a deal or a likely extension? More likely than not. So I'm not as worried about the mid-year default. I just unfortunately see this as more Washington games as usual," Versace said. 

While many on Wall Street and Main Street quickly associate the foreign concept of the U.S. defaulting on its debt as political posturing and expect a final-hour agreement, the debate remains yet another headwind facing May trading. 

Sell in May? 

So is it finally time to buy into the old and overplayed adage to 'sell in May and go away?' If you're a student of history, that would be a hard 'no,' according to Garner. 

Over on Real Money, Garner wrote that summer seasonality hasn't provided Wall Street diehards with their once prized time off in the Hamptons in some time with the weaker trading period once expected in the summer months not occurring until September at the earliest. 

"If you take data over the last five years, that trade would have performed horribly. Over the last five years, it's actually been more of a sell in September or October situation. The markets had summer rallies last handful of years. And I think we're probably setting up for that just given the fact that everybody's short and under allocated and I think that has to change," Garner said. 

FULL VIDEO TRANSCRIPT BELOW:

CARLEY GARNER: So the market was positioned for lower prices and a weak earnings season. But what we're getting is not necessarily a weak earnings season. It's not great, but it's not a disaster. And sometimes, if everybody's positioned on one side, that's really all it takes.

If it's just not a disaster, that's good enough to stabilize prices and get into a more normal environment. And I think we're seeing signs of that. We're seeing buyers come in on dips. We're seeing the VIX dribble lower and these are all good signs going forward of a little more stability. I mean, we're coming off a couple of years of just wild volatility in both directions. And I think the market's tired and I'm hoping we get back to something like we saw in 2019, where it's just a slow roll and we can all take a little bit of a breather.

J.D. DURKIN: The CBOE Volatility Index, or the VIX, headed lower throughout April until rising sharply just this past few days and then once again wobbling right around the 17 level. What does this tell you heading in to a new month of May, especially when next week's closely watched Fed meeting-- let's not forget, it will be Fed day before we know it.

CARLEY GARNER: I'm of the opinion that we're going into a period of a lack of volatility. I think that the VIX will continue to be under pressure, selling into rallies or not, let's just say, getting bearish-- the VIX on rallies-- is probably the right approach. The VIX has spent most of its time in the 15, 12 area, maybe even a few points above, but the reality is it's rare to see the VIX in the 20s and 30s like we've been accustomed to seeing the last couple of years. So I think that's going to continue to work its way lower and that too will be supportive for stocks.

One thing I want to mention is we always hear the mantra every year we come-- as April's coming to a close-- "sell in May and go away." That really has not worked for quite a while. If you take data over the last five years, that trade would have performed horribly. Over the last five years, it's actually been more of a sell in September or October situation. The markets had summer rallies last handful of years. And I think we're probably setting up for that just given the fact that everybody's short and under allocated and I think that has to change. And as we go into the summer months, there's also light volume. And light volume tends to support the upside.