Sell in May?

The financial industry is full of sayings and strategies that seasoned investors like to fall back on. Many of these are grounded in truth, others, a little less so. One that has been around a long time and continues to have legs is the old adage “Sell in May, and go away.” This refers to the notion that much of the stock market’s annual return comes before May 1, and then a seasonal decline occurs during the summer months. The market picks up momentum in the fall and finishes out the year strong. Therefore, investors will be better off if they pull money from the market in late spring, and jump back in during the fall. It seems like a pretty easy strategy to follow.

It’s also a pretty easy strategy to evaluate.

The chart below looks at the historical U.S. equity market return.

Historical U.S. Stock Market Return Average

Source: Ibbotson & Associates S&P 500® Composite with dividends reinvested to 1979 (S&P 500®, 1957-Present; S&P 90, 1926-1956); Russell 3000® Index 1979-present. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

At first blush, “sell in May” doesn’t appear to be such a robust strategy. June, July, and August all produced solid returns relative to the other months. In fact, July has historically been the second best month, trailing December by only 10 basis points. It is true that September is the only month that has posted a negative return on average, but even that number is somewhat skewed by a few exceptionally bad historical Septembers. For instance, September 1931 clocked in at -29.7%, making it the worst month in the history of this return stream.

Perhaps the “sell in May” proponents adhere to this strategy because of perceived limited upside during the summer? They assume that the traditional northeast financial crowd takes a summer holiday and the markets may suffer from the doldrums during this stretch. But, again the data doesn’t support this view. The following chart looks at the best returns by month.

Historical U.S. Stock Market Return Best

Source: Ibbotson & Associates S&P 500® Composite with dividends reinvested to 1979 (S&P 500®, 1957-Present; S&P 90, 1926-1956); Russell 3000® Index 1979-present. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

April, July and August have produced the third- and second-best monthly maximums. Of course, it’s pretty clear that April, July and August are outliers and unlikely to be repeated; but there certainly isn’t any evidence that the mid-year months offer any less upside potential that the months at the beginning or the end.

So, it must then be a downside story? The months of June through September must have seen historically horrific outcomes. As mentioned earlier, September did post the worst month ever during the midst of the Great Depression. However, the rest of the months in the span seem no worse when comparing the worst monthly returns. In fact, June, July, and August appear to be in the less bad category.

Historical U.S. Stock Market Return Worst

Source: Ibbotson & Associates S&P 500® Composite with dividends reinvested to 1979 (S&P 500®, 1957-Present; S&P 90, 1926-1956); Russell 3000® Index 1979-present. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Even September doesn’t look that bad when you dig down one layer. September’s second-worst month was down -14.0%. Not a great number by any standard but certainly within range of the other months’ worst returns.

It’s hard to say how some of these sayings gain a following. “Sell in May” has been around for years. Given the strong start to 2013, it seems to have garnered a little extra attention this year.1 Fortunately there is not a lot of evidence to support this strategy. So the next time that your client brings this up, suggest that the two of you take a look at the data; and then you can get back to the more important business of planning for the future.

1 “Stocks begin May with a sell-off,” by Hibah Yousuf, CNN Money, May 1, 2013

Historical stock data from 1926–1979 is from Ibbotson Associates, Inc., which publishes annual yearbooks featuring comprehensive, historical views of the performance of capital markets in the United States dating back to 1926.

Russell 3000® Index: Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

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