The popular phrase “Sell in May and go away” is an old adage in the financial realm.
The saying is a reference to a pattern of underperformance during the six-month period of May through Halloween.
Under the terms of the rhyme-scheme based saying, investors would cash out on their investments in May and enjoy a nice six-month holiday from stock picking before buying back in after Spooky Szn.
And while the phrase is undeniably catchy, and perhaps even feel like a good idea if you suffer from stock-picking fatigue during the summer, the advice may be more of a shot in the foot than a helpful piece of advice in recent years.
The notion that one should sell in May and then peace out on stocks for half the year is rooted in the fact that stocks have historically underperformed during these summer months, when compared with the winter ones.
From 1950 to 2013, the average return during the summer months for the S&P was a 1% dip, while November through April reaped 7.5% gains. So, undeniably, on average, you really didn’t want to be in the market during the summer in those years.
The full cause of this phenomenon is unknown, but it is assumed that a driver in this is the fact that people head off on their vacations during the summer months, which causes low-volume trading that muddles along during this time. This can also cause more volatility in markets, which, if you were away, it may have made sense to liquidate since you would have been unable to cut your losses in the days before mobile stock trading.
But when you are investing in a stock, you are investing in the future of a company, not its past. So historical scores that are pre-internet, pre-cell phones, pre-smart phones, and pre-4G LTE may be pretty poor comparison points.
Back in the day, if you traveled to another country or town, you had extremely unreliable communications. So if something went horribly wrong in the markets, you were going to face the brunt of the losses and there wasn’t much you could do about it. So if you were going into your vacation and things were looking slightly down, you might tell yourself that it’s better safe than sorry and liquidate.
But nowadays, we are connected with the outside world when we are on planes, cruise ships, and pretty much every other location on earth, within reason. From my Robinhood or other trading app, I can easily rebalance my portfolio while sitting at the blackjack table.
So while the adage has been, on average, very consistent over time, it has been less than consistent since the Silly Bandz craze of 2010.
From 2010 to 2019, markets advanced 2.58% during the summer months. So while that is still lower than the winter months historically, it surely isn’t a decline and it is definitely a higher rate than your bank savings account offers.
Additionally, a solid 30% of those years were rebounding from the Great Recession, which gives the decade ended 2019 an unfair hurdle and consists of 2 of the 3 declines experienced during the summer months. When recorded from 2013 to 2019, markets advanced 4.74% and only declined in 2015.
While neither of these have a large sample size like the historical numbers do, they certainly are more representative of the connectedness that we experience in our day-to-day lives here in the 2020s. So while trade volume all but halted in previous eras and caused some choppy months of trading, it’s extremely unlikely that average trade volume continues to face the same steep decline that it has experienced historically.
So will stocks rise over the coming months? Who knows. But looking ahead at the coming years, it’s likely that the pattern doesn’t continue to spell out a sell-all scenario. So with that out of the way, the only pattern we still have to worry about is the potential underperformance from another Tom Brady Super Bowl appearance.
