Reviewing the Old Adage, “Sell in May and Go Away”

A common saying in the world of finance is to “sell in May and go away.”  Historically, stocks have been known to underperform from May to October.  With the 2023 stock market subject to factors like high-inflation, bank collapses, and debt ceiling concerns, should we expect the trend to continue?  If you are interested in learning more about this mantra and the evidence associated, then I’d recommend reading along.

Key Takeaways:

·       Where Did it Originate?

·       Evidence to Support the Phrase

·       Evidence Against the Phrase

·       Key Considerations

Where Did it Originate?

The phrase “Sell in May and Go Away” originated in England in the late 1800’s.  However, the use of the phrase was different than it is today.  Back in England, this “Sell in May and Go Away” was used to describe the time when wealthy investors would take time off in the summer and return in the fall.  These investors would sell their positions before leaving and reinvest in the fall after they had returned.  Today, this phrase is used as a strategy to sell positions in May and purchase them back after October to avoid a period “historically known” for underperformance due to seasonal divergence. 

 Evidence to Support the Phrase

There is plenty of evidence that could be used to support either argument, but I will start with the support.  Since 1990, the S&P 500 has averaged a 2% gain between May and October compared to a gain of almost 6.7% between November to April.  Which means that approximate gain between November and April is 300% larger than the gain between May and October.  That said, the May-October performance is skewed downwards by the stock market collapses in October of 1987 and 2008.

The difference was attributed to Seasonal Divergence by supporters of the phrase.  This is again a dated concept, but the financial markets used to be heavily influenced by the agricultural seasons.  One of the reasons that this subject has gotten less attention in the United States in recent years is due to the reduced effect that agriculture has on the overall market.  That said, there was an academic paper that studied the stock markets outside of the United States and found seasonal divergence to be a factor. 

Evidence Against the Phrase

Objectively, it seems like more recent evidence does not support the “Sell in May and Go Away” adage.  The trend has not held many times in recent times as 9 of the last 10 years resulted in a positive geometric return during the May-October period.  A few of the largest gains happened in 2013 with a 10% return, 2017 with an 8% return, and 2020 with a 12.3% return.  As you can see, you would have missed out on significant gains in these years had you sold in May.  Therefore, you need to consider “missing the boat” meaning stock prices continue to increase once you have sold.  I will include a few other key points you need to consider below.  

 Key Considerations

The first consideration must be that historical trends do not guarantee the same results in the future.  As you can see from the sections above, there is evidence to support both sides of the argument.  I’m sure there are analysts that believe in this strategy and others that do not.  The truth is that nobody knows what is going to happen.  Therefore, if you think selling/not selling is going to be a sure-shot then you are mistaken.  Historical information can only be used to support an educated guess and nothing more. 

You should also know that timing the market is extremely difficult.  There are countless professionals that have dedicated their life to following the markets, and yet they still manage to rarely do it.  Let’s remember that they have the best technology, better research, and more experience than us.  If they could still struggle to do it, then what are the odds that a retail investor could seamlessly time and trade the market.  I’m not saying it cannot be done, but there are risks.  There was a study done that shows if an investor missed on the 10 best days of the market, their total return would have been less than half of an investor who simply held through.

Another important consideration is taxes.  The two primary types of accounts that we are concerned with are taxable and tax deferred.  Individual, Joint, and Trust brokerage accounts are all taxable account.  The sale of an investment is a tax event in a taxable account that will result in short or long term capital gains/losses.  Any capital gains will result in an increased taxable income at the end of the year.  To contrast, tax deferred accounts are not subject to tax when investments are sold, hence the tax-deferred designation.  Therefore, if you are going to sell an investment with a gain in a taxable account, then you must be prepared to cover the taxes associated.