The tulips have bloomed and warmer temperatures are here, which means it’s time for the “Sell in May and go away” punditry to flood the financial news media. Don’t buy into it.
Many readers are likely familiar with the ‘Sell in May’ adage, which says that investors should ditch stocks at the end of April, wait on the sidelines until Halloween or some arbitrary date in the fall, and then reinvest in time for the Santa Claus late-year rally. But it’s all just hocus-pocus, in my view.
Data going back to 1925 shows that in the six months between May and the end of October, the S&P 500 has gone up in 69 out of 95 years – which means stocks went up 73% of the time. ‘Sell in May’ advocates still somehow manage to direct focus on the 27% of down years. The broader point is often missed: in the 73% of up years, the average annual return is +4.3%. If investors perpetually miss this upside (even if the upside is fairly modest), it can have major implications on long-term returns.
It is probably worth adding that the ‘Sell in May’ strategy has not worked really at all in the last 10 years. The table below shows this clearly:
Over the Last 10 Years, “Sell in May” Has Basically Never Worked1
|Year||“Sell in May” S&P 500 Return|
To be fair, ‘Sell in May’ in the context of 2021 makes for an interesting case. Stocks are at all-time highs, and many would say the market is looking frothy. I tend to agree that certain areas of the market are overvalued, which I think argues for an active, research-driven approach like we do here at Zacks Investment Management. But what I don’t agree with is the perception that a frothy market makes the case for market timing, especially amid economic expansion. This type of thinking is ripe for mistake-making, in my view.
Because at the end of the day, ‘Sell in May and Go Away’ is a market-timing strategy dressed up as a seasonal, statistics-driven investment approach. Most readers know how I feel about market timing, especially for investors with long-term goals of growth. As I write in my book, The Little Book of Stock Market Profits, “Over the years I have yet to find a successful investor who obtained his or her returns through market timing…Active investment strategies can be developed that outperform the market over time – but engaging in behavior that borders on day-trading, because of what day is on the calendar, is ill-advised.” The same applies today, in my view.
Bottom Line for Investors
I have seen reputable pundits and even financial institutions still leaning into the ‘Sell in May’ adage and even noticed that the statistic has spilled over to Europe. One strategist noted that over the past 15 years, returns in Europe have been negative in June 80% of the time. Again, this is all hocus pocus and cherry-picking to me.2
To be fair, I think we should expect some bumpiness in the months ahead, particularly with the market rallying so strongly over the past year and out-of-the-gates in Q1. Volatility, combined with adages like ‘Sell in May,’ often tempt investors to want to do something in response. My advice: try to avoid such knee-jerk responses. If you are feeling any urge to adjust your asset allocation or to review your portfolio in response to volatility, please reach out to your Zacks representative first. That’s why we’re here.
As prudent, long-term investors, we should not try to time the market by season or any arbitrary date on the calendar. Stocks do not follow calendars, and neither should long-term equity investors.