This time each year investment pundits suggest we should “sell in May and go away”. The reason is that historical stock market returns in the U.S. have shown a tendency to be worse in the “summery” months of May through October and much better in the “wintery” months of November through April. You may also know this pattern as “The Halloween Indicator”.
First, some background courtesy of Investopedia. The expression didn’t originate on Wall Street but rather in London’s financial district. The full expression is “Sell in May and go away; come back on St. Leger’s Day”. The St. Leger’s Stakes is England’s oldest of five major horseracing events and the last one run each year.
So the idea is that the best returns occur between Halloween and May Day. History shows that between 1950 and 2018 the S&P 500 averaged a 7.0% total return (price gains plus dividends) from the beginning of November until the end of April. In those 68 years that index was up almost 77% of the time. From May through October, the S&P averaged a 1.5% gain, and was positive 64% of the time. (Kiplinger’s). However, this pattern doesn’t always mimic history. There have been recent years when the summer months have produced excellent results.
There are other seasonal patterns that the stock market exhibits during the year but this one has a solid statistical foundation. “Thus far we have failed to find a similar trading strategy that even comes close over the past six decades,” said Jeffrey Hirsh, who runs the Stock Trader’s Almanac.
Statisticians would say that “Correlation does not equal causation.”, but the returns above do represent statistical evidence of the seasonal phenomenon. However, in 2017 research by Mark Hulbert, writing in MarketWatch, revealed that “this pattern’s historical track record can be traced to only a few years, specifically, the third year of the presidential four-year term. During the other three years of the four-year term, in contrast, the pattern was statistically non-existent.” Hulbert’s research went back to 1896.
The biggest problem with “sell in May and go away” is that it is a trading strategy, useful perhaps for traders, but not for investors. It is another example of market timing and no one can consistently time the stock market successfully. It is time in the market that builds wealth, not market timing. To blindly follow seasonal trends or think automatic trading in an out of stocks is sound strategy is foolish, even dangerous to your financial success.
The reason it could be “Halloween in May” is that the near-term prospects for the stock market for the rest of this year could be fairly bullish. Stocks could move higher driven by strong GDP and consumer spending, a dovish Federal Reserve and solid corporate earnings reports.
Also, it’s the third year of the presidential cycle which is historically the strongest of that four-year cycle. From 1950 through 2015, the S&P 500 index has averaged a 16.4% return and has been positive in 15 of 17 of those third years. That average return is more than double that of any other year of the cycle. (Schwab Center for Financial Research)
But if you are more of a nervous “bear” than an optimistic “bull” on the stock market today, it would be wise to reduce risk in your portfolio. Not due to what the calendar says, but because of how your gut feels.