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Financial markets are chock full of oft-repeated quips and saying with one of the most heavily used being “Sell in May and go away.”
First, a couple of things about seasonal trading. It's not going to be the foundation of transactions within client portfolios. Second, even the strongest advocates of this trading style confirm it should paired with other indicators.
All that said, historical data confirm that there is a strong six-month period for stocks and a weak one with May marking the start of the latter. May itself, however, isn't a particularly bad for equities. It's actually decent as the S&P 500 averaged a gain of 0.40% in the fifth month of the year over the past two decades. That's a better average than January and February, both of which are solidly in the middle of the better six-month stretch for stocks.
Let Data Be Your Guide
In this era of rapidly evolving investing technology, high frequency trading and the like, some clients may be interested or even seduced by the idea of system that moves them in and out of equities based select variables, perhaps including changes of the calendar. Advisors can combat this line of thinking with ease because historical data confirm selling in May and going away isn't all it's cracked up to be.
“'Sell in May and go away' is a well-worn investor cliché. It suggests that from the May onwards equity performance tends to fall or weaken. If true, it would follow that in a perfect world – ignoring investment parameters and trading costs - an investor should divest their equity holdings in May and sit out stock markets over the summer,” notes FTSE Russell. “But analysis of the returns of two major markets over a quarter of a century. shows no evidence that Sell in May has consistently generated excess returns.”
When it comes to something like “sell in May and go away,” the point should be, particularly when accounting for elevated transaction costs and tax implications, to generate excess returns. If the strategy can't accomplish that, there's no point in incurring the negativity of pesky fees or capital gains taxes. To that point, the failure rate of selling in the fifth month and going to cash is too high for most clients to stomach.
Using the Russell 1000 and FTSE 100 Total Return indexes as the benchmarks for the three months starting May 1 dating back to 1996 indicates there's “no discernible pattern: both delivered a negative return on 14 occasions, and a positive return 11 times. Overall, the strategy would have failed 44% of the time,” according to the index provider.
Fed Ruined Sell in May
Assuming fans of selling in May remain, they can blame a familiar entity for the decay of this strategy: The Federal Reserve.
Rampant monetary easing in the years following the global financial crisis and the rejuvenation of bond buying in the wake of the 2020 coronavirus market swoon are damping the effectiveness of selling in May and going to cash. May 2020 is a recent, stark reminder of that as the Russell 1000 jumped more than 18% in that month.
“A similar analysis of the Total Return of the Russell 1000 and FTSE 100 in the three months from 1st November over the same time period suggests that QE and unconventional policy measures bolstered performance, with only seven years returning a negative return for the Russell, and the FTSE 100 delivering a negative return for nine years out of 25,” notes the index provider.
Bottom line: With the Fed a more active market participant than perhaps anyone could have imagined, it's best to ditch sell in May and let more practical, fundamental indicators guide the way.
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