The stock market will look like 'Charlie Brown's shirt' in May and beyond, investment strategist says

The Charlie Brown balloon floats on 6th Ave. during the annual Macy's Thanksgiving Day parade in New York City.
Stephanie Keith | Getty Images

Welcome to our monthly stock market outlook, where we preview what the pros will be monitoring and what everyday investors should know. Understanding what's happening in the market can make you a smarter investor and help inform your long-term strategy.

The past two months have been among the best, and worst, of times for the U.S. stock market. After the sharpest decline since the financial crisis for the S&P 500 in March, stock prices roared back in April for the best month in 33 years.

The extent of the economic damage created by the coronavirus pandemic so far is pretty stark: More than 30 million people filed for unemployment benefits in a six-week span and gross domestic product (GDP) fell 4.8% in the first quarter. Many uncertainties remain, especially related to the success of reopening the economies in several states around the country.

As a result, the debate about whether the worst of the coronavirus is over — from the perspective of public health, the economy, and the stock market — will continue to dominate the attention of professional investors in the month ahead. Until there's more clarity, there probably will be more turbulence in the stock market. 

"In the next several months, if you were to trace out the [zigzag pattern] design on Charlie Brown's shirt, that's what the market could look like," says Sam Stovall, U.S. equity strategist at CFRA Research. Even though the S&P 500 has recently experienced its best rally in decades, Stovall says this benchmark could fall near, or even surpass, that March low in the next six months — "and probably sooner rather than later."

Here's what you need to know about the month ahead.

'The market is looking past real-time economic data'

What's happening: The monthly employment report, scheduled for release on May 8, "is going to be lousy," says Mark Hackett, chief of investment research at Nationwide. Economists are forecasting the unemployment rate surged to 16% in April, making it the toughest month for workers since the Great Depression. They also expect that the U.S. is already in a recession.

The most useful economic data for Wall Street for the foreseeable future is the weekly report on the number of Americans who filed for unemployment claims, according to Hackett. Aside from that, "almost every data point is too backward-looking to be of much value."

What is the difference between a recession and a depression

Video by David Fang

Why it matters: Don't be surprised if traders don't appear to react to most economic reports in the month ahead, Hackett says. "The market is looking past real-time economic data" and focusing instead on the timing and success around reopenings in several states. 

Wall Street is already trying to predict what happens with respect to the pace of economic growth by the end of the year, with the four quarters already shaping up to be "terrible, catastrophic, better, and hopefully positive," in that order, Hackett says. 

What it means for you: The stock market is likely to remain volatile in May, as traders sort through the signs of progress and setbacks with respect to reopening the economy and the rate of Covid-19 infections. "There still are a lot of negative things that could happen between now and the all-clear," Hackett says. That's why you want to maintain a long-term perspective and avoid making any emotionally driven decisions with your portfolio, he adds. 

How to plan for stock market downturns

Video by Stephen Parkhurst

'Maybe a retest is on the way'

What's happening: A historic rally for the S&P 500 has sputtered more recently. And even though the S&P 500 has risen more than 27% since its March low, Stovall cautions that history suggests another decline is possible.

In prior bear markets, it was common for the S&P 500 to jump by at least 20% from a low, only to fall to an even lower level, Stovall says. For example, this happened during a two-month period in late 2008 and early 2009 during the bear market that coincided with the Great Recession, only for the S&P 500 to tumble further thereafter.

Why it matters: The May through October period historically is a weaker time, in general, for the stock market. And after the market's big rally, Stovall says that's why his "best guess" is that "maybe a retest is on the way" soon: "The only thing that will prevent it from happening is that so many people are waiting for it."

What it means for you: For long-term investors, a further decline will offer the opportunity to invest at lower prices once again. But it could just as easily spook other investors. And that's why it's important to make sure you don't let emotions dictate your investment strategy

The bottom line

There's a famous Wall Street adage to "sell in May and go away," meaning to sit out the stock market from May through the summer months. But Stovall says he's never been a believer in that advice, especially now, given the likelihood that the market at the end of May could look much different than it did at the beginning of the month, just as March did. "You don't want to look back and say, 'Why didn't I have the patience to ride that out?'"

Whether or not the market rises or falls in May will depend on the toll taken by the coronavirus pandemic and the success states see in reopening their economies in the weeks ahead. 

With the major benchmarks still in bear market territory, experts believe there's likely to be more turbulence for the foreseeable future. Of the past 12 bear markets since World War II, on average, the downturns lasted about 14.5 months and it took another two years for the market to recover, for a total duration of about three years, according to analysis by CNBC and Goldman Sachs. And strategists surveyed by CNBC forecast that the S&P 500 will end the year nearly 12% lower, based on their median estimate as of mid-April.

Famed investor Warren Buffett suggests that investors remain optimistic despite the pandemic because the U.S. economy has "always prevailed."

Regardless of what happens in the coming month, remember that you don't need to make any changes to your long-term investing strategy based on short-term events. The market's performance in 2019 is a good reminder to stay the course.

More from Grow: