Sell in May and Go Away?

An old market adage says to “sell in May and go away.” The logic behind this bit of market lore is that the summer months have historically produced relatively poor returns, and investors would benefit from selling their stocks in early May and coming back to the market in the fall, when returns have historically tended to improve.

In my opinion, while now may actually be a good time to trim positions and lower risk, the calendar month isn’t the reason why.

One of the most common findings in behavioral finance is that humans have a need to reduce complex systems to simple formulas. To that end, many investors find comfort in the notion that the time of the year, i.e.seasonality, is a viable investment strategy.

As I’ve written previously, I believe the significance of the calendar has been vastly overstated, with investors too often seeing patterns where none exist. In fact, with the exception of September, a consistently negative month for stocks, most seasonal biases are either functions of a certain time period or are insignificant when you adjust for normal market volatility. The same can be said for “sell in May and go away.”

A cursory glance would suggest that there is some evidence behind this rule. Looking at S&P 500 monthly data going back to 1927, history seems to support the notion that returns are indeed weaker in the summer and early fall. Over that time period, the average monthly index return in the May-September period has been 0.35%, net of dividends, while the average return for the other months was 0.78%.

However, the real culprit is September. Since 1927 the average return for September is -1.07%, significantly below the average for all the other months. If you repeat the exercise looking at May through August, the average monthly return is 0.70%, close to the average for all the other months. In other words, while September does tend to be unusually weak, the conclusion doesn’t extend to the entire summer.

Market performance so far this year also provides a good cautionary tale of why seasonality shouldn’t be the principal driver for investment decisions. The market suffered through a horrendous January, typically a strong month, and then enjoyed a strong rebound in February, historically one of the weakest months of the year as fundamentals trumped seasonal effects.

But while I don’t believe that the calendar should drive investment decisions, ironically the conclusion to “sell in May” may not be wrong this year.

As I have discussed in recent weeks, investors remain complacent, with volatility bouncing around historic lows. While the U.S. economy appears to be stabilizing and earnings are okay, neither is providing a strong catalyst for equity markets.

With valuations, at least in the United States, at the upper end of their historic ranges, investors may need to see better bargains to draw new money into the market. As such, this May probably isn’t a bad time to trim positions and lower risk: not because of the calendar, but because there are few bargains left.

Sources: Bloomberg, BlackRock Research

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. 


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