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Sell in May and Go Away?

There is an old stock market adage that states that every year one should “sell in May and go away”, not reinvesting in equities until November. This saying is based on the generally held principle that stocks rise more in the 6-month period from November to April than from May to October.

So far this May, the stock market (S&P 500) is up about +4.7%, so the "sell in May and go away" strategy hasn't got off to a great start - but it's still early days. Let's take a look at how this strategy has performed historically.

The chart below shows the returns of the following strategies:

  1. A simple sell equities strategy and retreat to cash (no interest) over the period. You sell at the end of April and reinvest at the end of August (during the US summer months).

  2. Staying with a buy and hold equity strategy all year round.

  3. Sell equities at the end of April, buy US Treasuries for the 4-month period, and buy back equities  whilst being fully invested at all other times.

Overall, the seasonal strategy wouldn’t have worked well, especially if you stayed out of all assets. Had you switched into Treasuries the trade would have slightly outperformed but with the buy and hold strategy having caught up in recent years.

You see, while overall returns during the (US) summer months are weaker than during the (US) winter months, the reality is more nuanced. Let me explain why. The only time the market has had a negative median return during the summer months was when it was already down significantly YTD. In years when the S&P 500 was down over -5% YTD through April, its median performance from May through October was a decline of -6.3%. In all other scenarios, both indices have had positive median returns. In fact, the performance of the S&P 500 during the summer months was positive at least 70% of the time outside of the above performance band.

During prior years when the S&P 500 was up between five and ten percent, the index's median performance during the summer months was 4.6%, which is the second strongest of the five performance ranges.

Source: Bespoke Investment Group

Like every other market maxim, while there is some truth to the "sell in May" trade, it is not a hard and fast rule.


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