Pundits’ New Take on the May Myth

May is off and running, and in a fresh and somewhat sensible twist, the vast majority of this week’s financial commentary does not think you should sell in May and go away until a certain British horse race or Halloween, depending on your preferred version of that old investing adage. We agree! But a quick exploration of why pundits aren’t all aboard the Sell in May train this year is telling about sentiment.

Much of this year’s Sell in May commentary didn’t outright dismiss the age-old myth, which states investors are best off skipping the summer months. The adage began life as a snappy saying that referred to old British traders’ penchant for taking the summer off until the mid-September St. Leger Day horse race, leaving liquidity low and making it appear beneficial to simply sit out the season.^[i] Then as the years went by and the six-month stretch from April 30 to October 31 delivered weaker average returns than its opposite six months, “weaker” incorrectly became synonymous with “bad,” and Sell in May became all about trying to avoid a pullback.

Now, the full range of S&P 500 data, which stretches back to 1925, shows this is a terrible idea. The six months from April 30 to Halloween have delivered positive returns in 69 of 95 years, a 73% frequency of positivity.^[ii] Its 4.3% average return may not sound astronomical, but it compounds over time, and if you don’t capture it, you miss a big chunk of stocks’ long-term returns.^[iii]

That, in our view, is the real reason to thumb your nose at Sell in May. Well, that and the fact that stocks don’t care about the calendar and any benefits the myth might once have carried became priced in many decades ago. (Same goes for the January Effect, Santa Claus Rally and September being the worst month.) But some articles had a different reason: the fact that Sell in May has been an especially huge bust in recent years. That is true! The past nine straight Sell in May windows have been positive, averaging 6.2% gains.^[iv] But leaning on it as reason to shun Sell in May smacks of heat chasing and presuming the recent past will predict the future. It basically translates to, “stocks will keep going up because they have gone up.”

We are bullish, of course. But when we see a chorus of pundits being bullish for less-than-sensible reasons, it gives us some pause, as it is generally a gateway to having irrational expectations. It starts with things like “ignore Sell in May because it hasn’t worked in nearly a decade.” Later, it snowballs until you get something like, “sure the yield curve is inverted and leading economic indicators point downward, but those don’t matter because stocks are up 20% over the last year, corporate earnings rose last quarter and <insert newfangled technology here> will dominate the world in 2040, bringing big riches for ground floor investors today.”

We aren’t there yet, obviously. There is still some skepticism laced in this year’s financial coverage, particularly on the inflation front. But sentiment’s ascendance remains critical to watch, because when pundits run out of worries, it is time to start looking for what they might be missing, for that is usually when bear markets begin.