It’s time to celebrate Easter and Passover. That means Spring is here and tea green buds once again populate the treetops. It also means its time to sell stocks and take a vacation. Or so they say. “Sell in May and go away” is an old saw that investors repeat without giving any real credence to.
But maybe they should.
June, July, August and September are historically the worst months of the year for the stock market. The average monthly return for that span over past 30 years is negative 0.1%. The average monthly return the rest of the year is 1.1%. So maybe there is something to “Sell in May and go away,” after all.
Unfortunately, the potential improvement in portfolio returns isn’t as much as you might hope for. Over the past 30 years, an investor following the “Sell in May” idea only beat his sleepier peers by 0.7% per year on average. And that return doesn’t include tax and trading costs from constantly selling and buying back your portfolio.
“Very few market corrections actually start in late April or early May,” market strategist Ed Yardeni told Barron’s. “The other problem with the old adage is that how do you know when to jump back in?”
That’s a fair point, and we are reminded of the wisdom in Edwin Lefevre’s investment classic, Operations of a Stock Operator. It’s tough to get back in once you’ve “lost your position,” as LeFevre points out. Losing your position refers to selling a stock. “Out of sight, out of mind,” to quote another old saw.
Still, the stock market does exhibit some strong seasonality. Stocks just aren’t as profitable in the summer months.
“It is a very good adage with a long history,” Stifel head of institutional equity strategy Barry Bannister said. “It is related to business and investor psychology. Toward year-end, investors grow concerned about the next year’s growth and sell stocks. Most years don’t feature a recession, so there is often a first quarter relief rally.”
That’s a fair point. There’s another explanation for why stocks struggle after May: The market is forward looking. In the first quarter, investors focus on current-year earnings. By the middle of the year, investors start to worry about next year’s earnings. The problem is, the new year is six months away, there isn’t company guidance yet, and there aren’t enough analyst estimates with which to value stocks.
If that’s the case, should investors sell in May this year?
Bannister can envision a scenario in which stocks suffer this summer. “China is important for world GDP and investors reacted positively to China’s stimulus in the first three months of 2019,” he said when we asked if this summer could be a weak one. “As the effects of Chinese stimulus fade, it could create a risk-off trade this summer.”
That’s one scenario.
“How do I view “Sell in May and go away?” Baird chief portfolio strategist Brian Rauscher said. “Well, first, historically it has worked. However, I have never and would never advise anyone to rebalance a portfolio simply by what the calendar says.”
That sounds like sounds like the best advice to us.
Write to Al Root at firstname.lastname@example.org