Should You Sell In May And Go Away?
Sipping Mai Tais on a white sandy beach can’t come fast enough as we count the days to summer. But, before you head out to your adventures, take a second to check your investment portfolio.
Now that May has officially arrived, many investors are wondering if it’s time to first sell some stock and then kick back for the summer. After all, there is a reason the “sell in May and go away” idea has stuck around.
How did this age-old adage come about?
The saying first emerged in Britain decades ago as “sell in May and go away and come on back on St. Leger’s Day.” English aristocrats, bankers and merchants would flee the muggy streets of London in the summer time for the cooler countryside. The St. Leger’s Stakes, the annual British Triple Crown horse race held in September, would enticingly lure them back in the fall.
The months of May through October are also known for their historically disappointing and underwhelming performance in the stock market. If you look at the average returns of the Dow by month since 1950, you can start to understand why this expression has stuck.
Historically, the Dow Jones industrial average has only earned an average return of 0.4 percent during the six months of May to October. Compare that to 7.5 percent for the months of November through April.
The average monthly returns for the S&P 500 from 1950 through 2015 for May through October are a meager 0.52 percent versus 1.42 percent for November through April.3
Differences in performance of the S&P 500 are displayed by various time periods. Long positions held only in in the months of May through September show significant underperformance.
Differences in performance of the S&P 500 are displayed by various time periods. Long positions held only in in the months of May through September show significant underperformance. Source: Business Insider
Although there are no concrete explanations for the vast variance in performance of these periods, there are some reasonable suspects.
Trading volume generally drops during the summer months when many people are away on vacation. Who wants to think about trading stocks when the sun is shining and the beach is beckoning?
Also, the winter months tend to have more investment flows as people harvest losses before the tax year is up, make final contributions to their retirement accounts and put their year-end bonuses into the market.
Corporate and investment banking calendars typically slow down in the summer as well. It’s not unusual for the Wall Street elite to escape the bustle of Manhattan and bask in the luxuries of The Hamptons.
Examine insights from seasonal trends of the past.
Based on these trends and qualitative research, some investors alter the timing of their buys and sells because they believe that they can earn more in the market by following seasonal trends. Even though a stock’s performance can be based on a company’s performance and profitability, perceptions and expectations can make an impact as well.
Some stocks and industries have a tendency to show more seasonality than others. For example, banking issues are generally strong between October and May. The oil sector often experiences upticks in December and retail tends to perform well during the school year between September and June.
Meanwhile, the expression, “don’t forget to come back in September,” has come into play because that month has commonly underperformed across the board compared to the rest of the year.5 Thus, many investors look to invest in September if prices drop and if they anticipate prices to rise in the coming months.
Historical data can help you determine when to make trading decisions. Just remember that the market is unpredictable and past trends do not guarantee similar patterns will occur in the future.
Some investors could care less about what month it is.
Despite history’s support of the “sell in May” strategy, some analysts remain skeptical or dismiss the concept entirely because it contradicts established theories like the efficient-market hypothesis. Those who believe existing share prices always reflect all relevant information think it is impossible to beat the market.
Some long-term driven investors also disregard the notion of selling in May and remain focused on their lengthy end game. They generally prefer a set it and forget it approach.
Search for clues to help predict the future.
Is there anything different this year that could impact investors’ decisions to sell this month? One important fact to note is that this is an election year following a two-term presidency. U.S. presidential election years bring about more uncertainty and volatility than non-election years. On average, the S&P 500 has dropped an average of 1.2 percent in year eight of presidential terms since 1900.6
Some predict that the stock market could get a boost this summer due to the upcoming election. Since the Dow was created in the late 1880s, it has averaged 4.2 percent gains between May and October during presidential election years. Compare that to 1.3 percent returns in non-election years.
The caveat is the inconsistency of the data year to year, making the fact that 2016 is an election year insignificant to some analysts. Recent presidential election years have proven the stock market to be unpredictable – 2008 was especially awful and the Dow lost over 27 percent between May and October that year.
Past data illustrates differences in DJIA performance in election versus non-election years. In particular, the month of August can be notably stronger during election years. Source: Marketwatch
Even if the stock market doesn’t receive a boost this summer due to the election, you may still want to consider holding onto some or all of your stocks. Take a look at your overall investment portfolio and revisit your short- and long-term goals. Also, think about the care and feeding of cash balances if you plan to make big changes to your liquid assets.
However you decide to invest, it is helpful to be aware of historical patterns and the various strategies that some investors apply at different times of the year. The more you learn, the better prepared you can be to make your own investment decisions.
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.