A Cute Little Rhyme
Having worked on Wall Street for over twenty years, I have had countless conversations
about the seasonal tendency for investors to "sell in May and go away". Wikipedia describes
the concept this way:
"Sell in May and go away is an investment strategy for stocks based on
a theory (sometimes known as the Halloween indicator) that the period from
November to April inclusive has significantly stronger growth on average
than the other months. In such strategies, stocks are sold at the start
of May and the proceeds held in cash; stocks are bought again in the autumn,
typically around Halloween. It is the belief that it's better to avoid
holding stocks during the summer period."
Markets Are Not That Easy
Investors like market forecasts because they want to feel like they have some
control over what in the real world is a very uncertain future. Investors like
seasonal patterns for the same reason. Does it make sense to solely base your
investment strategy on any seasonal pattern? Markets take all factors into
account, including seasonal tendencies, Fed policy, earnings, valuations, geopolitical
tensions, and systemic risk. The list of factors impacting asset prices is
almost endless and goes well beyond a cute little rhyme like "Sell in May and
Go Away".
What Does History Say?
If you sold on April 30, 1990 and sat out the month of May, you missed a eye-popping
9.20% gain in the S&P 500.
In 1997, stocks returned 5.86% in the month of May, making the "sell in May" crowd
very uneasy.
What Does The Bigger Picture Look Like In 2015?
Seasonal patterns can be helpful, but taking a broader view of risk-and-reward
easily passes the common economic sense test. This week's video looks at numerous
markets allowing us to peek behind the probability curtain based on hard present-day
data, rather than a rhyme.
Video: Stocks Vulnerable To "Sell In May"?
Back To The History Books
In the spring of 1985, Coca-Cola introduced the "New Coke" much to the dismay
of the soft drink consumers. The stock market was a bit more cheerful, posting
a 5.41% gain between the end of April and beginning of June.
While many were still very skeptical about stocks in the wake of the dot-com
bust, the charts were saying "things are looking better". The S&P 500 agreed
by tacking on 5.09% in May 2003.
But, The Market Was Different Then...Right?
The market is always different, which is why ignoring present-day data and
instead relying on the history books can produce very disappointing results.
Those who chose to move to cash on the last trading day of April 2013, missed
a 2.08% gain in the S&P 500.
"Sell In May" was not particularly helpful in 2014 either. The S&P 500
advanced 2.10% in May of last year.
Investment Implications - The Weight Of The Evidence
According to moneychimp.com,
since 1950 the S&P 500 has been green in May 37 times and red 28 times,
with an average change of 0.11%. An average gain of 0.11% is nearly a coin
flip, which aligns with the "pay attention to the current data" approach. The
current data, as outlined in the video above, is still calling for an equity-heavy
allocation. When the data calls for a reduction in our exposure to stocks,
we will not hesitate to make the necessary adjustments.
