“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.
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).
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:
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.
Despite these favorable statistics, there are limitations to implementing this strategy.
It is generally best not to rely on horse race legends that are not explained by actual market trends or economic analysis.