This time of year, one refrain reigns supreme among investors: “Sell in May and go away.” The classic, rhyming investment adage argues you should get out before the “weak” summer months, re-entering in the fall. Many are convinced markets demonstrate seasonal patterns you might be able to game to your advantage. But there is a problem, in our view: The calendar doesn’t drive markets. A look at historical data illustrates how chasing this supposed seasonal tendency has most often been a costly mistake.
The saying’s origins are in British markets’ early days, when brokers typically took long summer breaks, leading to light trading volumes and little liquidity. Many presumed this increased risk and dampened returns. Hence, the adage, “Sell in May and go away, and come back on St Leger Day,” gained popularity. The St Leger Stakes is the final major event of the British horse-racing season, held annually in September.
Today, few recall the origins of “sell in May.” Instead, most point to the Stock Traders’ Almanac, which states returns during the six-month period from November through April are best. The Almanac suggests a “Best Six Months” switching strategy, calling for folks to ditch equities before summer months—selling April 30—and returning October 31 (what we will call, “the out period”). But history isn’t on the side of “sell in May” proponents. Since 1925, when good US stock market data begin, the S&P 500 has averaged a 4.2% total return during the out period.[i] That is a 4.2% gain¸ mind you. So while it is true the out period lags October 31 – April 30’s 7.3% average total return, it still doesn’t make much sense for a stock investor seeking growth to avoid it.[ii] Nor is May typically a bad month. Returns average 0.3%, which isn’t great—but it isn’t the worst either.[iii] Actually, September is—the only month with a negative return. But September’s weak returns are driven by a few extreme periods in 2008 and the Great Depression, offsetting generally positive returns. (Exhibit 1)
Exhibit 1: Average Monthly Returns are Typically Up a Little
Source: Global Financial Data, Inc., as of 4/10/2019. S&P 500 Total Return Index, average monthly returns, 12/31/1925 – 3/31/2019.
Of course, averages aren’t all-telling. A month could be negative much more often than not but still have an average positive return if the up years are big enough. But as Exhibit 2 shows, that isn’t the case—historically, May is positive more often than not. (Exhibit 2)
Exhibit 2: To Stocks, a Month Is a Month Is a Month
Source: Global Financial Data, Inc. as of4/10/2019. S&P 500 Total Return Index, frequency of positive and negative monthly returns, 12/31/1925 – 3/31/2019.
Over the S&P 500’s history, monthly returns are positive 63% of the time.[iv] Most months cluster near this frequency. The upshot of this: “Sell in May” has worked—avoided negative returns—26 times since 1925.[v] Only a 28% success rate! Its 67 failures make it wrong 72% of the time![vi] Just our hunch, but we would suggest that is probably not the best investment idea. The impact of this is clear: missed gains.
As Exhibit 3 illustrates, the strategy’s frequent failures mean investors following a repeat “Sell in May” strategy may be missing quite a lot. This exhibit shows the hypothetical growth of $100,000 invested in the S&P 500 in January 1980. The green line is straight buy and hold—no exiting the market. The yellow line employs a strict “Sell in May” approach, exiting stocks every April 30 and re-entering October 31. Of course, the margin of difference would vary based on what, exactly, the investor did with the cash while out of the market. But if our hypothetical illustration is any indication, whatever they do would have to be pretty good to offset stocks’ growth.
Exhibit 3: Staying in Versus Selling in May Since 1980
Source: Global Financial Data, Inc., as of 4/10/2019. S&P 500 Total Return Index, 12/31/1979 – 3/31/2019. *Annual rate of return assuming $100,000 hypothetical portfolio starting value.
That is just the missed opportunity! Taxes are another factor. Consider another hypothetical: You are an investor with a $1,000,000 taxable (non-retirement) investment portfolio. You have been in stocks for a few years now, and 30% of your $1,000,000 portfolio is long-term capital gains. If you sell, that 30%, or $300,000, is likely to be taxed at 15%, yielding a potential $45,000 tax bill. To recoup this means whatever you do during the summer months would have to outpace stocks by at least 4.5% for it to be a winning strategy—and that is without accounting for trading costs. The transactions alone put “Sell in May” at a disadvantage. Even if you have tax losses to offset gains or are using a tax-deferred account, trading costs likely apply, albeit to a lesser extent.
Perhaps “Sell in May” works in 2019. Anything is possible over such short stints. But if so, it won’t be due to any seasonal pattern. There is just a lack of evidence selling in May is a strategy likely to boost returns. Instead, in our view, it is more beneficial to determine your portfolio’s exposure to equities based first on your goals, needs and comfort with short-term volatility. Second, base it on your view of how economic, political and sentiment drivers will impact demand for stocks over the next 12 – 18 months.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Source: Global Financial Data, Inc., as of 4/9/2019. S&P 500 Total Return Index, 12/31/1925 – 3/31/2019. Average return for the six months from April 30 – October 31.
[ii] Ibid. S&P 500 Total Return Index, 12/31/1925 – 3/31/2019. Average return for the six months from October 31 – April 30.
[iii] Ibid. S&P 500 Total Return Index, 12/31/1925 – 3/31/2019. Average returns by month.
[iv] Ibid. S&P 500 Total Return Index, 12/31/1925 – 3/31/2019. Percent of months with positive returns.
[v] Ibid. S&P 500 Total Return Index, 12/31/1925 – 3/31/2019. Percent of negative returns during the six months from April 30 – October 31.
[vi] Ibid. S&P 500 Total Return Index, 12/31/1925 – 3/31/2019. Percent of positive returns during the six months from April 30 – October 31 periods.
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