The famous adage “Sell in May and Go Away” is believed to have originated from an old English phrase that say, “Sell in May and go away, and come on back on St. Leger’s Day.” This refers to a custom where the aristocrats, merchants and bankers would leave the city of London and go to the countryside during the hot summer months. They would then come back on St. Leger’s Day which refers to the St. Leger’s Stakes thoroughbred horse race that is held in mid-September.
In the U.S. investors and traders also tend spend time away from the offices going on vacation between Memorial Day and Labor Day. This replicates the same custom of their counterparts across the Atlantic in London.
The popular financial expression “Sell in May and Go Away” therefore refers to an investment strategy to sell the market (or go away) during May 1st to October 31st and then buy (or return to) the market from November 1st and April 30th. This six-consecutive months of investing in the marketplace is based on the premise stocks tend to underperform during the six-month window beginning in May and ending in October and outperform during the six-month period from November to April.
Seasonality studies tend to attract Main Street and Wall Street interests. Some believe the primary drivers for stock outperformance during the November to April period are due to the following:
(1) Many major holidays occur during this time (i.e., Halloween, Thanksgiving, Christmas, New Years, Valentine’s Day, St. Patrick’s Day, Easter, and Mother’s Day).
(2) Spending picks up during this period (i.e., back-to-school spending, Black Friday, and Cyber Monday sales).
(3) Reinvestments plans are active during this time frame (i.e., 401k, 403b, 457, 401a, Defined Contribution, and Benefit Plans).
(4) Other payouts contribute to stock inflows (i.e., year-end employer bonus, tax refunds during spring, and year-end capital gains and bonus dividends reinvestment plans).
In summary, a lot of money circulates within the economy during November to April including retail spending, investment inflows, and reinvestment programs.
So, is it true that during the warm, summery periods when trading volume are low and presumably many market participants are on vacations that this leads to volatile and lackluster performances in stocks?
If you factor in the concerns surrounding the COVID-19 pandemic and the uncertainties in the upcoming US Presidential Election Year, then you may want to delve further into the numbers as it pertains to the seasonality investment strategy.
What are the statistics saying?
Numerous academic and wall street studies have been conducted on this six-month seasonality investment strategy. There remains no right or wrong answer as to why this seasonality works so well over the years and past performances are also no guarantee of future success. Nonetheless, unlike many other seasonal patterns it has been remarkably consistent, and some say even robust as evidenced by the dramatic outperformance between the two time periods.
Enclosed below are four key U.S. stock indexes and the last 20-years of monthly performances. As you can see from the charts below, they clearly show the superior performances across key indexes during the six consecutive months from November to April as compared to May to October.