What is “Sell in May and Go Away”?
The financial adage “Sell in May and go away” is well-known. Historically, it is predicated on the underperformance of equities throughout the six months from May to October.
The Stock Trader’s Almanac popularized the historical pattern by stating that substituting fixed income for equities during the remaining six months of the year would have “produced reliable returns with reduced risk since 1950.” The Dow Jones Industrial Average is the symbol for stocks.
According to Fidelity Investments, the S&P 500 index has gained an average of around 2% from May to October since 1990, while it has gained an average of almost 7% from November to April. This difference has persisted in recent years.
A similar pattern was noted in academic research that examined stock markets outside of the United States and referred to the seasonal divergence tendency as “remarkably robust.”
Theories for the Seasonal Divergence
The seasonal rhythms associated with agriculture used to impact financial markets, but given farming’s drastically decreased economic weight, these patterns have probably faded to insignificance.
The year-end financial sector and corporate bonuses may continue to drive seasonality in investment flows, and the mid-April deadline for paying U.S. income taxes may also play a role.
The October stock-market disasters of 1987 and 2008 have made the historical pattern more prominent, whatever underlying factors may be at work.
The S&P 500 had an 8.1% loss in 2011, the last notable stock market downturn from May to October. Compared to the same months in 2015, the S&P 500 fell by 0.3%.
How about selling in May and moving on?
The inaccuracy of previous patterns as a future predictor is its single flaw. This is particularly true for well-known historical trends. The “Sell in May and Go Away” trend would quickly disappear if enough people believed it was here to stay. Early sellers would attempt to sell in April, and in October, they would compete to purchase the stocks before the rest of the market.
The seasonal tendency’s averages also hide significant annual variations. Seasonality has minimal effect in any particular year since there are many other, often more important, factors to consider. Those who followed that adage in 2020 would have been well advised to sell in May, as the S&P 500 had a 34% decline over five weeks in February and March due to the COVID-19 epidemic, only to recover 12.4% from May to October.
Indeed, according to LPL Research, the unfashionable summer half of the market year averaged a respectable but unspectacular return of 3.8% in the decade through 2020, with no discernible fall since 2011.
Return of the S&P 500 “Sell in May” (May–October)
S&P 500 Year “Sell in May” Go back
- 2011 -8.1%
- 2012 +1.0%
- 2013 +10.0%
- 2014: Up 7.1%
- 2015 -0.3%
- 2016 +2.9%
- 2017 increased by 8.0%.
- 2018 is up 2.4%
- 2019 increased by 3.1%
- 2020 +12.3%
Liaison: LPL Research
Early in 2022, the advice to “sell in May” was also inaccurate; the S&P 500 had dropped 8.8% in April and 13.3% since the year’s beginning.
In conclusion, the historical pattern is evident, but its ability to forecast the future is debatable, and there may have been significant opportunity losses.
‘Sell in May and Go Away’ Alternatives
Rather than taking the proverb literally, investors who think the pattern will hold should shift their investments from riskier market sectors to ones that typically do better during down markets.
Pacer ETFs sponsors an exchange-traded fund that aims to use seasonal rotation as an investment strategy. For example, between 1990 and 2021, a custom index representing the strategy of rotating between healthcare and consumer staples stocks held from May to October and more economically sensitive market sectors from November to April would have done much better than the S&P 500. 5. As of April 29, 2022, the Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF (SZNE), with around $80 million in assets, has dropped by more than 12%.
The wisest course of action for many individual investors with long-term objectives is still to purchase and hold—that is, to hold onto stocks continuously over a year, barring a change in the fundamentals.
Conclusion
- The proverb “Sell in May and go away” implies that equities traditionally perform worse in May and October than in the other half of the year.
- On average, the S&P 500 has returned 2% annually from May to October since 1990, compared to 7% from November to April.
- 2020 the trend did not hold, and other factors took precedence in subsequent years.
- Based on previous data, investors might profit from the trend by switching from May to October to less economically vulnerable equities.
