Sell in May, Go Away (10 year look back)

“Sell in May and go away” is an old Wall Street saying that suggests investors sell their stocks during the summer to avoid a seasonal decline in the stock market. An investor selling their stocks in May would then buy stocks again at the end of Summer or early Fall because the Summer season shows significantly less growth in the market than other times of the year.

The History

Where did this “Sell in May and go away” advice originate? Not on Wall Street, but rather in London’s financial district. The original saying, “Sell in May and go away, come back on St. Leger’s Day” refers to a horse race.

That’s right, a horse race.

The St. Leger Stakes is one of England’s greatest horse race and is run in late September. London traders would sell their shares, enjoy their Summer, and return to the market after the St. Leger race.

The idea is based on seasonality and with this strategy, traders are only invested in the stock market for about seven months out of the year (October through April).

But This Time It’s Different, Right?

Not in 2019. If you followed the old adage during the first week of May with the thought of returning to the market after Labor Day, you made the right choice. The S&P 500 delivered a -6.58% loss. However, you would have made the wrong choice 70% of the time had you followed the advice during this latest bull run. Let’s look at the performance of the S&P 500 for the month of May dating back to 2009:

• 2018:  2.16% gain
• 2017:  1.16% gain
• 2016: 1.53% gain
• 2015: 1.05% gain
• 2014: 2.10% gain
• 2013: 2.08% gain
• 2012: -6.27% loss
• 2011: -1.35% loss
• 2010: -8.20% loss
• 2009: 5.31% gain

Statistics on this Strategy

Historically, stocks have done better during the winter-early spring period. According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has gained an average of 7.5% during the November-April period since 1950. Its average return has been only 0.3% during the May-October period in those same years.

In addition, the Dow Jones Industrial Average has lost money in only 14% of the November-April time periods since 1950.

Limitations to this Strategy

Despite these favorable statistics, there are limitations to implementing this strategy.

• No one knows when to start: From 1988-2015, according to economist John Mauldin, the best strategy might have been “Sell in August, buy in mid-October”.
• With any strategy based on averages, any given year might show an extreme high or extreme low, a wave that a buy-and-hold investor could ride out.
• Investors lose short-term gains to taxes because short-term gains are taxed at your ordinary income rates and not long term capital gains rates.
• Investors face additional transaction costs due to selling stocks, followed by buying stocks later.

Speak with a Financial Professional 

It is generally best not to rely on horse race legends that are not explained by actual market trends or economic analysis.

Talk to your Financial Planner or Investment Advisor about creating long term investing strategies that will help you grow your money without having to rely on outside noise.