“The summer of the stock market’s discontent might have started early, with a negative first quarter that perhaps anticipated the May-to-November stretch that historically is the worst six-month period for equity investors.
Next month also begins the half-year ahead of the midterm elections, the weakest six months for stocks in the presidential cycle. And the worst of these have come during the first term of Democratic presidents, according to the Stock Trader’s Almanac.
What Is “Sell in May and Go Away”?
“Sell in May and go away” is a well-known financial-world adage. It is based on the historical underperformance of some stocks in the “summery” six-month period commencing in May and ending in October, compared to the “wintery” six-month period from November to April.
If an investor follows this strategy, they would divest their equity holdings in May (or at least, the late spring) and invest again in November (or the mid-autumn).
If you sell in May and Go Away, you will exit the stock market in May, wait things out over the summer and early fall, then buy back into stocks come November.
Real-World Examples of “Sell in May and Go Away”
| S&P 500 “Sell in May” Returns (May-October) | |
|---|---|
| Year | S&P 500 “Sell in May” Return |
| 2010 | -0.3% |
| 2011 | -8.1% |
| 2012 | +1.0% |
| 2013 | +10.0% |
| 2014 | +7.1% |
| 2015 | -0.3% |
| 2016 | +2.9% |
| 2017 | +8.0% |
| 2018 | +2.4% |
| 2019 | +3.1% |
| 2020 | ? |
From 1950 to around 2013, the Dow Jones Industrial Average has had an average return of only 0.3% during the May to October period, compared with an average gain of 7.5% during the November to April period, according to a 2017 column in Forbes.
While the exact reasons for this seasonal trading pattern were not known, lower trading volumes due to the summer vacation months and increased investment flows during the winter months were cited as contributory reasons for the discrepancy in performance between the May to October and the November to April periods.
However, recent statistics suggest that this seasonal pattern may not be the case anymore. According to a May 2018 article in Investor’s Business Daily, if an investor had sold stock in May 2016, she would have missed some lucrative runs.
The NASDAQ ended April 2016 at 4775.36; it closed higher in May and soared in late June. The NASDAQ rose by 55% from the end of June 2016 until the end of January 2018.
Any Need to Sell in May and Go Away?
At the end of the day, Sell in May and Go Away is just another attempt to time the stock market. While it can work, it might be more trouble than it’s worth, particularly if you’re a long-term investor.
Before we review some history, consider some history that’s still fresh. In May 2021, J.P. Morgan Wealth Management advised against Selling in May and Going Away.
In fact, between 2010 and 2020, you only would have benefited by Selling in May and Going Away in the year 2011. In every other year of that decade, you would have outperformed the market by somewhere between 0.8% and 13.9% by staying invested from May through October.
Additionally, you might not hold investments in broad indexes such as the S&P 500. As Fidelity points out: “…since 1990 there has been a clear divergence in performance among sectors between the [two] time frames—with cyclical sectors easily outpacing defensive sectors, on average, during the ‘best [six] months.’
“Consumer discretionary, industrials, materials, and technology sectors notably outperformed the rest of the market from November through April. Alternatively, defensive sectors outpaced the market from May through October during this period,” according to Fidelity.
While the firm suggests investors consider “sector rotation” based on this data, it urges caution and close consideration. Fidelity suggests it might make more sense to let go of winners come May that you don’t want to hold for the long haul and to use those profits to stick to your original investment strategy.
J.P. Morgan gives essentially the same advice, warning that the tax consequences of moving in and out of positions so frequently could reduce any profits you realize by Selling in May and Going Away.
Alternatives to “Sell in May and Go Away”
Instead of selling in May and going away, some analysts recommend rotation. This strategy means that investors would not cash out their investments but would instead vary their portfolios and focus on products that may be less affected by the seasonal slow growth in the markets during the summer and early autumn, such as technology or health.
Of course, for many retail investors with longterm goals, a buy-and-hold strategy—hanging onto equities year-round, year after year, unless there’s a change in their fundamentals—remains the best course.
Whether to sell?
If we look at the percentage increase in interest rates this year from the short to the long end of the curve. The Fed has accomplished a tremendous amount of tightening already by merely communicating its intentions to do so. While having only increased the federal funds rate by 25 basis points.
That has depressed the value of technology stocks more than any other sector, which in turn weighs on the broad market, as the six largest tech behemoths account for approximately 25% of the value of the S&P 500 index.
This gradual rotation out of growth stocks will continue until long-term rates stabilize. Meanwhile, it provides plenty of fodder for those who are forecasting an end to the current economic and market cycle, as though it were the year 2000.
The Fed had been increasing short-term rates for a year before it started to shrink its balance sheet in 2017, and the S&P 500 rose 16% during the following 12-months of quantitative tightening, while the 10-year yield rose from 2.3% to 3%.
It was not until the 10-year rose to 3.25% and the rate of economic growth slowed to less than 2% that the S&P 500 dropped 19%, forcing the Fed to reverse course.
The economy was not as strong then as it is today, but we were not confronted with the highest rate of inflation in 40 years. Still, I believe the economy and markets can absorb a higher 10-year yield than they could in 2018 before it slows the economy to the point that the S&P 500 suffers another bear market. That number is closer to 3.5%.
I also see the rate of inflation peaking and waning sooner than the consensus expects. As a result, market expectations for rate hikes in 2022 are probably too aggressive. I will be recalculating my numbers on Tuesday with the Consumer Price Index report for March.
What should you do now in 2022?
“Sell in May, and go away!” It’s a well-known Wall Street saying. If you are new to the markets, or even if you are more seasoned, it can be easy to overlook the wisdom of that short phrase. So, here is a quick snapshot of the S&P500 over the summer period to underscore just how weak the stocks are from May through to the end of October.
Over the last 72 years If you had bought the S&P500 from the end of May through to the end of October each year then you would have only had an average return of +1.29%.
In contrast, the period between April and October is far stronger. You can see that holding the S&P500 from October 31 through to April 30 gives an average return of +6.53% over the last 72 years.
So, If you had taken this each year for the last 71 years it would have given you an annualized return of +13.60%. The win ratio would have been 77.46% and the maximum profit would have been 26.31 which was last year.
In conclusion, there is no need to sell in May, but it is prudent to be selective as financial assets reprice to adjust to a monetary policy tightening cycle that comes with higher interest rates and a rate of inflation that settles in a range of 3-4% over the coming 12-18 months.
The economy should grow 2-3% this year. Since stocks and bonds will be competing for liquidity, it is also sensible to focus on quality and value, while avoiding speculative and expensive assets. I still expect the S&P 500 to finish the year with modest gains, but volatility with remain elevated as rotation between sectors and asset classes continues.
