The adage ‘Sell in May and go away, but buyback (or come back) by St Leger Day” or equivalents such as “Sell in May and go away, but be back in September”, is something that pops up every year in May. This is for the obvious reason that it’s about the month of May. I never really gave too much thought about what it really meant. I’d like to have a closer look and see if it can actually be beneficial to my return.
It won’t come to anyone’s surprise that this has been investigated in the past. What might come as a surprise for some is that the stock exchanges really don’t like spring and summer.
This is certainly the case when we look at the average stock market performance of previous decades. The saying “Sell in May and go away, but buyback by St Leger Day” or the more popular (and modern) second part “but remember to come back in September” is backed by facts and figures.
Several academics such as Bouman & Jacobsen, and Lucey & Whelan examined the performance of the six months from May to November and the six months from November to May.
The figure on the right shows the comparison between the average return in the two six-month periods for each country. We can see that returns are concentrated in the November-April period, with an average of 7.5% across each country, compared to 1.58% in the May-October period.
In the study performed by B. Jackobson, over the 323-year period studied a ‘sell in May’ strategy, whereby investors exit stocks and hold risk-free treasury bills during the summer months, the effect holds in 36 out of 37 countries and over decades. Their study finds that on average the winter period – November through April – has a 4.2% higher return than the summer period. We also learn that it’s more prevalent in countries located in Europe, North America, and Asia than in other areas.
The researcher B. Lucey and S. Whelan did the exercise for various periods in 2001. Their powerpoint, “Seasonality in Equity Markets: Half-Yearly and other Apparent Anomalies”, is even available online.
In their research, they saw that the prices were much better in the six months of the winter period in most of the cases. The stock markets performed 3.7% better than government bonds on average in the good six months, compared to 0.9% weaker than government bonds in the six months of the summer.
These results are significant, but these are averages. So there are many years when and markets where this is not the case. Moreover, timing does not yield spectacular returns. The effect is small, returns to implementing the Halloween strategy are ~1.5% better per year before taxes and fees, on average, than a basic buy and hold plan.
The difference can increase for those who put their money in a savings account in the summer period, but today that does not yield nearly as much as it did in the past.
Additionally, the strategy ‘only’ works for 6 out of every 10 years. This is clearly an edge over the proverbial flipping a coin. As such, the strategy can have a positive impact on your portfolio.
Sell in May: what does this mean?
The study of Lucy and Whelan is for a maximum of 67 years. But the research of Jackobson that goes back centuries always provides hints of a negative effect of the summer period on the stock exchanges.
You’d think that if I want to participate in the extremely difficult timing of the markets I know what to do now. Few other trends on the stock market are so clear, except that on balance the stock markets always climb.
In truth though, the studies don’t clearly explain why the effect continues. Any story spun so far is an opinion or thought. That said, the weight of evidence now available is obvious; the sell-in-May effect has existed for some time, and continues to exist.
Because I don’t know the root cause of this effect I think it’s easier and safer to stick to an investing strategy. At least I understand the reason behind it.
How would you feel if you sell your stocks in May only to witness a big rally over the coming months? What if the same pattern plays out over the coming years? Don’t forget about other complications such as transaction costs, taxes, etc.
Even knowing it should work, I won’t be selling my shares this month after all.
- Jacobson, B., Zhang, C. Y. (Rev. 2018), The Halloween Indicator, ‘Sell in May and Go Away’: Everywhere and All the Time. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2154873
- Lucey, B. M., Whelan, S. (2002), Monthly and Semi-Annual Seasonality in the Irish Equity Market 1934-2000, Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=298045