“Sell in May and go away” is a common mantra on Wall Street.
Certain investors use seasonality—an indicator for how stocks may do better or worse at particular times during the year—as a factor on making investment decisions.
You might have heard phrases like the Santa Claus Rally, which points toward how sometimes the stock market does well at the end of the year.
The May maxim is a negative one.
Eddy Elfenbein, an investment portfolio manager, explains,
A few years ago, I ran through the entire history of the Dow Jones Industrial Average, going back to its start in 1896. What I found was that from May 6 until October 29, the Dow has gained an average of just 0.71%. For the rest of the year, from October 29 to May 6, the Dow has gained an average of 7.16%.
This means that roughly 10% of the Dow’s annual gain has come in one half of the year, while 90% has come during the other half.1
Well, that doesn’t sound good. Furthermore, this data is something to be aware of when considering investment risk.
Is Eddy selling everything in his fund because of this? No, of course not.
Here are a few reasons why one should be cautious when making investment decisions based on this kind of adage.
1) Past performance is no guarantee of future results. What happens if May through October does well this year?
2) A knee-jerk all-in, all-out move is dangerous. If it does do well, then what are you going to do? Buy at higher prices than you sold?
3) Over the last decade, selling in May hasn’t worked too well. According to Ryan Detrick of Carson Group, the S&P 500 has been up an average of 4.9% between May-October and has only been down two out of those ten years.2
4) If you did it in a taxable account, you need to consider potential capital gains and get tax advice.
5) If you employed the strategy of only being in the market for part of the year, you may pillage the effects of compound interest in your portfolio.
6) Finally, the fact is, even though it is historically the worst 6-month period for the 500 or so biggest stocks on Wall Street, May through October is still up 1.7% on average and higher 64% of the time since 1950.3
Remember, changes in your investment allocation should be built on a financial plan, financial needs, and risk tolerance before you make investment decisions based on seasonality or forecasts.
I have no idea whether this year will be a year where May – October is good, bad, or ugly.
Long-term financial planning trumps short-term conjectures regarding seasonality.
- CWS Market Review, May 16, 2023.