Stocks continued to march higher in April, trying to break out of their 15-month trading range. At month’s end, the S&P 500 index was just peeking at new highs. Large-cap and more growth-oriented stocks have broken marginally to new highs, while value-oriented stocks, smaller companies and foreign stocks remain below their earlier highs.
With the month of May now upon us, the old Wall Street adage of “Sell in May and go away” is once again making the rounds in the financial news media. Where did this phrase come from, and is there any validity to it? As Investopedia.com notes, the phrase likely originated in England with the full version as “Sell in May and go away and come back on St. Leger’s Day.” Bankers would leave London during the hot summer months and return to the city by mid-September. The same cultural phenomenon is thought to have been inherited by American markets with investors and traders taking long vacations during the summer months while markets underperform in their absence.
What do the numbers tell us?
The bulk of the markets’ gains do, in fact, transpire outside of the May-through-September time period. According to UBS, if we look at the May-through-August periods from 1928 to present, the S&P 500 index has had an annualized return of just 2.3%. Over the last 30 years, the results are even worse—minus 0.10%, according to Barron’s.
Regardless of time period, we do see a pattern in which stocks tend to lag in the middle part of the year compared with at the beginning and at the end of the year. The chart below illustrates this tendency well. The blue line represents holding the S&P 500 for the fall, winter and spring months, while the red line shows the performance of the S&P 500 index if we owned the index only for the summer months.
Of course, we do not necessarily agree that one should automatically sell in May. Markets may continue to rise through the summer months. They did so in 2018 when stocks rose almost 9% during the summer and in 2017 when the May-through-August period produced a 3.5% return.
At FSA we are aware of the “Sell in May” phenomenon, but we won’t act on that alone. As long as the overall trends of the various stock and bond markets are rising, we are content to remain invested. When those trends reverse, that is our cue to sell and go away.
This year has been strong thus far, and we have all of the strategies with heavy equity allocations (notwithstanding some selling in early May). If stocks can break and hold above their previous highs, we will get the portfolios fully invested. If, on the other hand, stocks break down and begin to roll over, we will be quick to raise cash, especially during this seasonally weak period.