Around this time last year, the S&P 500 was at an all-time high. Back then, we cautioned against loading up on stocks in the hope they’d keep hitting new highs. Not because we have a crystal ball but because we know successful long-term investing requires diversification. Since then, US equities have struggled to regain their footing. Is it perhaps time to heed the old Wall Street adage “Sell in May and Go Away” (until November)? Given that summer is about to start, we thought we’d take a look at where that advice comes from, and why we don’t heed it.
The idea behind “Sell in May and go away” is to sell stocks in May to avoid a seasonal decline in the stock market. That’s because the six or so months between November and May show significantly stronger returns in the stock market than the other half of the year.
Intriguing, right? Where did this “Sell in May and go away” advice originate? Not on Wall Street, but rather in London’s financial district. The original saying, “Sell in May and go away, come back on St. Leger’s Day” refers to a horse race – St. Leger’s Stakes – that took place in late September.
Let’s Look at the Numbers
As it turns out, US stocks have done better during the winter to early spring period. According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has gained an average of 7.5% during the November-April period since 1950. Its average return has been only 0.3% during the May-October period in those same years.
This could be because November through April is typically when a lot of money flows through the economy and the stock market: holiday spending, back to school spending, year-end bonuses, tax refunds, etc.
Still, the “Sell in May and Go Away” premise holds up if you go all the back to 1950. We are in a different world now. From 1988 to 2015, according to economist John Mauldin, the best strategy might have been “Sell in August, then buy in mid-October.”
Even if you were to actually implement the “Sell in May” advice, you’d be paying higher taxes on any short-term gains, higher transaction fees, and the risk of missing out on gains during the other half of the year. Trading on seasonal strategies named after a horse racing tradition is not our cup of tea at all. We’ll stick with long-term, diversified investing grounded in research and analysis.