Fretting over whether to “sell in May and go away” is one of Wall Street’s most tiresome annual rituals. And over the next few days, investors and the financial media are sure to give this dubious old saw far more attention than it deserves…
Here’s our contribution.
Way Back in the Day
The “sell in May” proverb is said to have originated centuries ago in England when merchants, bankers and other interested parties in London’s financial district noticed that investment returns generally did worse in the summer.
Incidentally, the original saying went “Sell in May and go away, and come on back on St. Leger’s Day,” a holiday held in mid-September. In America, it has essentially come to refer to the period between Memorial Day and Labor Day.
Getting back to the modern era: There is evidence that the stock market, on average, tends to underperform in the six-month period between May and October. However, analysts, market timers and academics who have studied the phenomenon extensively can’t settle the matter conclusively one way or the other.
If they could, we wouldn’t be having this discussion every year.
What strategists do tend to agree on is the answer to the question of whether investors should sell in May and go away:
Sell in May and Go Away? Here’s What the Numbers Say
Sam Stovall, chief investment strategist at CFRA Research, sums up the “Should I sell in May?” conundrum facing investors in 2021 this way:
“Some say yes, in anticipation of a long overdue digestion of recent gains triggered by lofty valuations. Others say no, since valuations are justified by a projected second-half surge in gross domestic product and earnings per share growth, due to pent-up consumer demand, the expenditure of recent stimulus checks, and the anticipated passage of an infrastructure package.”
Stovall adds that the “strongest six months of the year,” as popularized in The Stock Trader’s Almanac, tells us that the price return for the S&P 500 from November through April has recorded the highest average price change of any rolling six-month period.
“Conversely, the ‘sell in May’ adage reminds investors that average May-through-October price returns have historically been anemic,” Stovall writes.
Historical average performance can tell us only so much, of course. Past performance, as we all know too well, is not indicative of future returns.
For the record, thanks to Dr. Ed Yardeni of Yardeni Research, we do know unequivocally that the worst individual months for average stock market performance are not found exclusively in the post-May period.
Indeed, per Yardeni, since 1928, average monthly price changes for the S&P 500 are actually pretty good during the dog days of summer.
Although May is tied with February for producing the S&P 500’s second-worst average price change (-0.1%), July is actually the single best month for average price change (+1.6%). Interestingly, June and August – at +0.7% and +0.8%, respectively – both offer…
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