Should You Sell in May and Go Away? Probably Not

Stock Returns Tend to Dip Mid-Year, But Abandoning the Market May Not Pay Off

KEY TAKEAWAYS

• “Sell in May and go away” is a popular adage that suggests investors get out of stock holdings in the summer months and invest again around Halloween.
• While historical stock performance shows evidence of lower returns during summer months, advisors don’t recommend investors pull out of the markets.
• Expectations for a strong market performance the remainder of the year stem from the robust start to 2024 for equities, as well as evidence from prior Presidential election years.

Major U.S. stock indexes have hit all-time highs this past week, and it’s May, which begs the question: Is it time to lock in your profits and come back to the market later in the year?

“Sell in May and go away” is a stock market adage suggesting investors bail on stocks in the summer months, when returns tend to moderate, and reinvest in the fall. While history shows stocks generally perform better in the colder months, financial advisors don’t recommend embracing a sell-in-May strategy.

“Attempting to time the market is a fool’s errand,” said Austin Marrs with TSA Wealth Management in Houston. “Investors should not let emotions, current events or even catchy slogans dictate their long-term investing.”

The Summer Slowdown For Stocks

The idea behind “sell in May and go away” is that stocks tend to do little during the summer months, picking up again during the fall, as the Halloween effect comes into play. And so, the idea goes, investors should sell off their equity positions in May and put money back into stocks come November.

Historical data confirm that stocks tend to tread water from the beginning of May through the end of October.

In the last 80 years, the S&P 500 Index (SPX) has increased an average of 6.9% in the six months starting Nov. 1, and it has posted positive returns in 61 of those 80 timeframes, according to Bespoke Investments. Conversely, in the same eight-decade stretch, the index has increased an average of just 1.7% in the six months starting May 1.

Stocks also tend to rally stronger early and late in the year. The S&P 500 has surged 20% or more in one of every eight years during the past 80 yearsincluding the six-month period through last month. Since 1945, it never has surged 20% between May 1 and October 31.

The Pitfalls of Staying on the Sidelines

Since it became an index of 500 stocks in 1957, the S&P 500 has on average returned 11.65%. Had investors during that time period only invested from November through April, they would have missed out on a sizable chunk of additional returns.

After all, even though returns tend to fall from May through October, they still remain positive, on average. The index has posted losses in just 27 of the last 80 May-October periods, Bespoke said.

“Overall, the seasonal strategy wouldn’t have worked well, especially if you stayed out of all assets. Had you switched into Treasuries the trade would have slightly outperformed but with the buy and hold strategy having caught up in recent years,” said analysts at Deustche Bank.

The S&P 500 has declined just twice from May through October during the past dozen years, according to Bespoke.

“It’s not about timing the market, it’s about time IN the market,” said Chris Mankoff, an advisor with LPL in Plano, Texas, “and missing periods of positive returns will limit your upside potential.”

Kevin Brady, an advisor with Wealthspire in New York City, concurs.

“Positive and negative returns occur so closely to each other, especially in times of uncertainty, that you’ll miss any rebound in trying to minimize loss,” Brady said.

What About This Year?

An investor following the strategy this year could have missed out on sizable gains in the first few weeks of May. The S&P has added 5.3% so far this month, as the index has scaled record highs on multiple days amid optimism about strong corporate earnings and hopes the Federal Reserve will cut interest rates this year.

Lawrence Fuller, leader of the investing group at The Portfolio Architect, notes that some investors may want to choose to limit their divestment to May through August—when summer distractions peak and stock market trading typically ebbs.

However, historical odds may favor remaining invested this year.

When the S&P 500 posts a gain in the first four months of the year, as it has this year, it has finished the year higher all but four times in the past 40 years.

More recently, the index in the 21st century also has exhibited 18% less volatility from May through October than during the other six months of year. Moreover, the average differential in returns versus the rest of the year diminished from earlier time periods—meaning risk-adjusted returns improved even more.

“Do not sell in May and go away,” said Bank of America analysts, especially in U.S. Presidential election years.

“Presidential election years can see big summer rallies. June-August is the second strongest 3-month period of the year for all years going back to 1928 with the SPX up 65% of the time on an average return of 3.2%. In Presidential election years, the SPX is up 75% of the time from June-August on an average return of 7.3%,” they said.

The Allure of Easy-to-Remember Rhyming Schemes

So why do market adages seem so timeless?

Patrick Huey, owner and principal advisor of Victory Independent Planning in Camas, Wash. and author of History Lessons for the Modern Investor, said that the “rhyme or reason fallacy” allows sayings such as “sell in May” to persist.

Our brains, Huey said, tend to remember things that rhyme. And people tend to act on things they remember—even if they’re not necessarily accurate. So his advice to investors remains relatively simple:

“Please don’t do anything in any month,” he said, “based on seven syllables and a rhyme scheme.”

Read the original article on Investopedia.