Sell in May?

The month of May is here and with it comes the constant and predictable drumbeat from the financial media about the seasonal history of the stock market. Like many investing patterns trumpeted by the mass media, there is some validity behind it, but there is also much more to the story.

According to Mark Hulbert, "Over the past 50 years, the Dow has an average return of 7.5% from November through April (winter) versus an average loss of 0.1% from May through October (summer)." Using the S&P 500 produces only marginally better results. However, those statistics leave out part of the story, for as the Fat Pitch Blog notes:

"(The) data is skewed by a few outliers; stocks fell 37% in the summer of 2008, by 20% in 1974 and by 15% in 1987, to name a few. Using median values, winter's return is 5% versus 4% in summer. That's a very small difference. The returns in summer are typically positive, meaning you might very well sell in May and buy back higher in November. Overall, 76% of winters since 1970 have been positive; fewer summers are positive (67%), but the difference is slight."

Fat Pitch continues and concludes:

"Great returns overwhelmingly take place in winter. (To wit) 37% of winters produce a return of 10% or more. In comparison, only 17% of summers have produced a great return. A good stretch in the market is more than twice as likely during the winter as the summer. . . . In summary, the period from May through October is known as the 'worst 6 months' of the year for stocks. True, the probability of a truly bad month is higher, and the probability of a really great stretch of months is lower, during the summer than in the winter. But, overall, the expected return over the next 6 months is positive: median returns in winter and summer since 1970 are nearly the same. You might very well sell in May and buy back higher in November."

Of course if getting good investment results were as simple as being fully invested in the winter and fully in cash in the summer, every investor would be using that strategy and enjoying long and peaceful summers of being on the sidelines. But both our experience and the statistics tell us that it is not that easy, and our collective investing history tells us that patterns and trends (seasonal and otherwise) are constantly changing. And just when it seems like a strategy such as seasonality is accurate enough to follow, the global markets throw a curveball and all the rules go out the window. That is why every investment strategy, however structured it may be, must have the flexibility to adapt to changing market conditions.

So when you hear the frequent repetition this month of "Sell in May and go away", now you will know this catchy little phrase has only a marginal track record as an actual investment strategy.

Hope that perspective was helpful as we enter the summer investing season!

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