“Sell in May and leave” is a famous adage in the financial world, probably based on the six-month period from May 1st to October 31st when stock prices were depressed. The Stock Trader’s Almanac popularized this idea of historical patterns. You can invest in stocks, such as the Dow Jones Industrial Average, from November to April (we will discuss this as the “winter” period), and switch to bonds for the remaining six months (“summer”). , “You would have had a reliable return.” Risk has decreased since 1950. ”
What the magazine doesn’t point out is that using the S&P 500 index, which dates back to 1927, would have yielded the opposite result. In other words, summer almost always outperformed winter. Our analysis shows that during the 1930s and 1940s, the S&P 500 index’s summer returns were 11.23% and 4.51% higher than its winter returns, respectively. For this and other reasons, this maxim has since been widely discussed.
Important points
“Sell in May and leave” is a saying that refers to the historically low stock prices from May to October compared to the other six months. Since 1990, the S&P 500’s average annual return from May to October has been about 3%. However, winter does not always give higher returns than summer. Based on historical data, investors may try to take advantage of this pattern by rotating into less cyclical stocks from May to October. But for most investors, the best strategy is generally to ignore the noise, buy and hold stocks.
Nevertheless, over the long term, on average, stock prices worsened during warmer seasons in subsequent decades. For example, the S&P 500 index has risen about 3% on average from May to October from 1990 to 2023, but about 6.3% from November to April from 1990 to 2024. It was. These numbers vary between approximately 3% and 4.5%. Going back to 1930, these are summer and winter respectively.
Why such a difference? And is a decline in summer returns a good enough reason to switch to bonds during that time? Even if there is a difference in summer and winter performance for stocks, the S&P 500’s Summer returns are still very good on an annualized basis and are better than other securities. So, as we’ll see, it’s a good idea for most investors to stay put during the summer. We will explain the following data.
Why are stock prices seasonal?
The seasonal rhythm of the stock market is another aspect of investing that traders have long tried to predict. The underlying causes of these price fluctuations remain the subject of intense debate among financial experts. However, the transaction volume tends to decrease during the summer due to summer holidays. However, this rate of change is not correlated with the change in demand due to a decrease in trading volume. Seasonal deviations in stock prices require examining the potential influence of human psychology, organizational behavior, and macroeconomic forces.
The summer doldrums aren’t the only calendar effect that at least some investors are likely paying attention to. Other factors include the “January effect,” which states that stocks, especially small-cap stocks, tend to rise at the beginning of the year. This could be due to the harvesting of tax losses in December followed by reinvestment in January, or the psychological boost from starting the new year with renewed optimism. However, as the market became more efficient and aware of this pattern, its predictability and magnitude decreased.
Looking at the SPDR S&P 500 ETF (SPY) over the decades from 1993 to 2023, January had 17 winning months (57%) and 13 losing months (43%), with odds of an increase Slightly higher than average. Toss a coin.
Institutional factors can also influence seasonal price differences. With the fiscal year of many mutual funds ending in October, many investors are encouraged to rebalance their portfolios or do “declaration” (selling low-performing stocks and replacing high-performing stocks in order to improve the appearance of quarterly reports). (act of purchasing) may take place. This activity can cause price pressure in certain sectors and contribute to seasonal patterns.
How about selling it in May and disappearing?
The disadvantage of using past patterns for trading is not only that you cannot reliably predict the future. It also means that once recognized, they become a thing of the past as other companies in the market try to exploit them. If enough people become convinced that others are really selling on the idea of going into bonds in May and back in November, there will no longer be any advantage to be gained. Early sellers will bid against each other to sell in April and buy back their shares in October.
Even if this seasonal divergence in the market remained, exiting equities in May and re-entering equities in November would have historically led to a number of missed prospects. . Using S&P 500 numbers, we can see a general trend of winter months outperforming summer months. However, the situation becomes more nuanced when we talk about trading conditions in a particular year. The picture becomes even more nuanced when we focus on specific situations, trading goals, etc.
For example, suppose you were given $300 to trade in the winter and summer of 1990, and you wanted to experiment by investing $100 only in future winter periods (taking profits out of the market at the end of each period). I will. April) and invest $100 only during the summer (and do the same every October 31st). The chart below illustrates this scenario (leaving aside transaction costs and other fees, but including dividends as part of these returns).
The $100 you would have put in over the summer is now worth $249.33. Although not as impressive as a winter-only strategy, this growth is a large positive return that investors would miss out on if they exited the market during the summer. That’s because these numbers are combined with other months to give you a higher overall average annual return, including dividends.
Additionally, the data shows that there were many years when summer performance was strong or even outpaced winter returns. Consider 2020 as a prominent example. Summer returns were an impressive 24%, but winter returns were negative at -7.7%. Similarly, in 2009, the summer return was 21.9%, while the winter return was -9.4%. These examples highlight that automatically following a “sell in May” strategy can cause you to miss out on significant gains in a given year.
It’s also important to note that constantly timing the market, such as selling in May and buying back in November, incurs transaction costs and tax implications that can eat into profits. This strategy ignores the benefits of dollar-cost averaging and dividend reinvestment, which greatly contribute to long-term portfolio growth.
Average seasonal trends also hide large year-to-year variations. In any given year, the effects of seasonality are overwhelmed by a variety of other, more pressing causes of market change.
Elections also tend to disrupt the May-October slump. Ed Clissold of Ned Davis Research noted that since 1950, the S&P 500 has risen 78% from April 30 to October 31 of presidential election years. This compares to about 64% in non-presidential election years during the same period.
Finally, it is unclear whether the reason is actually seasonal, rather than related to a particular month or other moment based on the calendar. Below are the average monthly returns for the three major U.S. stock indexes since their emergence.
Below are monthly returns for the S&P 500 only over a 10-year period from 2014 to the end of 2023. The data suggests that warmer months are the problem, as opposed to specific months such as September.
Alternative to “If I sell in May, it will disappear”
Rather than acting on this adage and exiting stocks, investors who believe such a pattern exists may pivot away from riskier market sectors to sectors that tend to outperform during market downturns. There is.
The Center for Financial Research and Analysis (CFRA) report found that cyclical sectors, such as consumer staples, industrials, materials, and technology, tended to outperform from November to April and were more defensive (i.e. It claims to be a generally recession-proof sector. ) Summer essentials and healthcare sector. Since 1990, the S&P 500’s consumer staples and health care sectors have outperformed the broader market, rising an average of 4.1% from May to October.
CFRA materials are included in marketing materials for exchange-traded funds (ETFs) that seek to take advantage of seasonal market fluctuations. The premise of the Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF (SZNE) is to invest between healthcare and consumer staples stocks held from May through October and more economically sensitive market sectors from November through April. A custom index representing a rotating strategy would have significantly outperformed. S&P500.
If you look at annual profits going back to SZNE’s launch in July 2018, that’s not the case as of Q3 2024.
Its fees were 12 times higher, even though it did not fit into the S&P 500 index’s buy-and-hold strategy. A typical S&P 500 passive index fund has an annual fee of 0.05%. SZNE’s commission is 0.60%.
Market dwell time vs. market timing
Most investment professionals dislike the adage, “If you sell in May, you’re gone” because it encourages investors to keep segmenting and changing their portfolios. In reality, most investors are better off adopting a buy-and-hold strategy, and I’ve seen how even experts can’t outperform simply holding the S&P 500 for the long term. We have seen it.
Unless the fundamentals change, continuing to hold stocks year-round, year-in-year-out, helps reduce fees, eliminates the risk of panicking and acting irrationally, and generally improves returns. Connect. There is plenty of evidence to support this.
For example, Charles Schwab provides helpful analysis of different trading methods to show potential profits. Their scenario assumes that several investors were given $2,000 each year for 20 years starting in 2003 and were able to invest. Here’s how much each investor ended up with at the end of the period:
Investor with perfect market timing (waiting to buy the S&P 500 at the lowest price each year): $151,391 Investor who invests $2,000 immediately at the beginning of each year: $135,471 Investor using cost averaging (regular ): $134,856 Investor who mistimed the market (bought the S&P 500 index at the highest price of the year): $121,171 Investor who kept the accumulated money in cash: $44,438
The point of this analysis is to show how much you can make by simply putting your money into a broad market index. However, it’s also worth noting that the chances of picking the exact low price to buy more shares in an S&P 500-tracking ETF every year are pretty low, so the attrition from doing so doesn’t make the results that much worse.
What is the best month to buy stocks?
On average, the strongest months for stocks since 1950 have been April and November. However, this is not always the case. For example, the S&P 500 had a negative monthly return in April 2024.
Is May the worst month for stocks?
History has shown that May is the second-worst performing month of the year for the stock market after September. But there were also many good months for stock investors, including 2024 and 2020.
It also depends on which index you think best represents the stock market. Since its inception, November was the best month for the Nasdaq Composite Index and July was the best month for the S&P 500.
Will “if you sell in May, it disappears” still work in 2024?
It wasn’t the best start. The market rebounded in May and June and has not yet retreated as of July 30, 2024.
conclusion
The adage “If you sell in May, you’re gone” has become a hot topic among investors. Looking at returns over several decades, stocks tend to perform worse on average over the last six months. However, there are many exceptions, and the average performance during the warm season is not enough to justify investors making significant changes to their portfolios.
