Sell in May Episode V: History Strikes Back

April showers bring May flowers, but dour financial media types aren’t as chipper. Some think 2018’s uncertainty means more volatility and trouble for stocks—making the seasonal adage “Sell in May and go away” seem more apt this year, in their view. Don’t forget the four most dangerous words in investing: “This time is different.” Seasonality doesn’t matter to stocks, so don’t let fun phrases determine your portfolio positioning or market outlook.

For a refresher, the full adage is “Sell in May and go away, don’t come back until St. Leger Day.” This originates from the 19^th century, when London Stock Exchange brokers would take long summer vacations starting in May. They would come back after the St. Leger Stakes horse race in mid-September. Brokers on break meant less trading and little liquidity—ostensibly a headwind for capital markets that weighed on returns.

The modern interpretation of “Sell in May” has a slight twist. Financial number-crunchers found that the end of April to the end of October was the year’s weakest six-month period, on average, seemingly justifying an exit from equities. At first blush, history might seem to back those arguing stocks take a summertime snooze. Using S&P 500 data for its long history, average returns from April 30 – October 31 do trail all other six-month periods from 1926 – 2017.

Exhibit 1: S&P 500 Average Rolling Six-Month Returns, 1926 – 2017

 

Source: Global Financial Data, Inc., as of 4/11/2018. S&P 500 Total Return Index, January 1926 – December 2017.

But don’t overlook a critical part of these data: That “weakest” period is still positive. If you are a long-term, growth-oriented investor, missing out on positive gains can set you back in reaching your investment goals.

Recent history shows how damaging selling in May could be. For most of this global bull market, following this timeworn investing adage would have been a losing endeavor.

Exhibit 2: What if You Sold in May During This Global Bull Market?

 

Source: FactSet, as of 5/2/2018. MSCI World Index return with net dividends, 12/31/2008 – 12/31/2017. Shaded periods cover 4/30 – 10/31. The global bull market started on 3/9/2009.

Besides the operational costs—e.g., commission costs and, depending on account type, taxes—selling in May has carried a big opportunity cost over the past eight years. It “worked” in 2011 and 2015, but otherwise, “Sell in May” practitioners missed out on some nice gains. This doesn’t mean stocks will do fine this summer because they were mostly positive during recent “Sell in May” periods. Rather, this is a simple reminder that during bull markets, stocks rise more often than they fall—regardless of the time of year.

In our view, global stocks are still positioned to have a great year, even with the ongoing market correction. The drivers underpinning this bull market—positive economic fundamentals, rampant political gridlock, persistently dour sentiment—remain intact. These factors have a much greater influence on what stocks will do looking ahead—not a cute seasonal saying that the market priced in eons ago (if there was anything to price in to begin with).