The famous adage "Sell in May and Go Away" is believed to have originated from an old English phrase that says, "Sell in May and go away, and come on back on St. Leger's Day." It is a yearly custom for the aristocrats, merchants, and bankers to leave 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 in mid-September. In the U.S., investors and traders tend to spend time away from the offices going on vacation between Memorial Day and Labor Day.
6-month Stock Market Performance Strategy
In the financial markets, the expression "Sell in May and Go Away" refers to an investment strategy to sell the market (or go away) from May 1st to October 31st and then buy (or return to) the market from November 1st and April 30th. The premise is stocks tend to underperform during the six-month window beginning in May and ending in October and outperform during the six months from November to April.
Reasons for Stock Market Performance
The stock market's outperformance during the November to April period can be best explained by the following:
(1) Major holidays occur during this time (i.e., Halloween, Thanksgiving, Christmas, New Year, 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) Reinvestment plans are active during this time frame (i.e., 401k, 403b, 457, 401a, Defined Contribution, and Benefit Plans).
(4) Other payouts (i.e., year-end employer bonus, tax refunds during spring, year-end capital gains, and bonus dividends reinvestment plans).
In summary, the abundant amount of money that circulates within the economy from November to April, including retail spending, investment inflows, and reinvestment programs can directly influence stock market returns.
Is it true that during the warm, summery periods when trading volume is low and presumably many market participants are on vacation, this leads to volatile and lackluster performances in stocks?
When you factor in the concerns surrounding the Fed monetary policy, recession, geopolitical conditions, inflationary pressures, commercial real estate, and regional banking turmoil, it may be worthwhile for traders and investors to delve further into the seasonality tendencies.
Does the Seasonality Tendencies Work?
Academics and Wall Street professionals have conducted numerous studies to determine the validity of the six-month seasonality investment strategy. Although it remains a hotly contested subject, the data does show that, on average, the November to April periods tend to outperform the May-October periods.
Note that past performances are no guarantee of future success. However, unlike many other seasonal patterns, it has been remarkably consistent, and some say even robust, as evidenced by the significant discrepancy in performance between the two time periods.
In the past 20 years, the discrepancy between the two timeframes is quite noticeable within SPX, INDU, SML, and MID, while less so with the COMPQ and NDX. For instance, during the seasonality weakness period from May to October, SPX generated an average return of 2.5% as compared to an average return of 5.3% during the seasonal strength period from November to April. Nearly 68% of the yearly SPX return (7.8%) came from the seasonal strength period from November to April. The outperformance is repeated in INDU (2.2% versus 4.9%), SML (2.8% versus 6.6%), and MID (1.4% versus 7.8%).
Surprisingly, the two over-the-counter markets, COMPQ and NDX, did not follow the seasonality tendencies of their listed and smaller market-cap peers. For example, in the past 20 years, COMPQ returned 5.0% from May to October and 6.0% from November to April. NDX also showed similar performances of 6.6% and 6.3%.
Will the above seasonality trend repeat itself this year?
Can the historical relative seasonality strength from COMPQ and NDX during May-Oct 2023 offset the weakness from the other indexes?
Will a soft or hard landing (recession) during the second half of 2023 influence the Sell in May and Go Away seasonality trends?