‘Sell in May and Go Away’ is a renowned saying in finance. This adage is predicated on the historical underperformance of stocks during the six-month span from May to October.
The historical pattern became notable through the Stock Trader’s Almanac, revealing that investing in stocks (as exemplified by the Dow Jones Industrial Average) from November to April and switching to fixed income over the other six months provided reliable returns with reduced risk since 1950.
The divergence remains pronounced in recent years. The S&P 500 index has gained an average of around 2% from May to October since 1990, compared to an approximate 7% gain from November to April.
An academic study even found a similar pattern in stock markets outside the U.S., dubbing the seasonal divergence trend as ‘remarkably robust.’
Key Takeaways
- ‘Sell in May and Go Away’ suggests historically weaker stock performance from May to October compared to the rest of the year.
- Since 1990, the S&P 500 has averaged returns of about 2% annually from May to October, versus about 7% from November to April.
- The pattern was an anomaly in 2020 and is often overshadowed by more urgent considerations in other years.
- Investors can capitalize on the pattern by rotating into less economically sensitive stocks from May to October, according to historical data.
Theories for the Seasonal Divergence
Financial markets were once influenced by seasonal agricultural agendas, but these influences have faded given the decreased economic weight of farming.
Seasonality in investment flows may persist due to year-end financial industry and business bonuses, with the mid-April U.S. income tax filing deadline also playing a role.
What compounds this historical pattern are October stock-market collapses noted in 1987 and 2008. The last significant stock-market decline between May and October took place in 2011, where the S&P 500 dropped by 8.1%. In contrast, the S&P 500 saw a mere 0.3% decline during the same months in 2015.
Why Not ‘Sell in May and Go Away’?
The primary pitfall of historical patterns is their unreliability in predicting the future, especially when they become widely known. If enough market participants act on the ‘Sell in May and Go Away’ premise, the pattern may dissipate as early adopters sell in April or try to rebuy stocks early in October.
Furthermore, year-to-year fluctuations can overshadow seasonal tendencies. For instance, following ‘Sell in May’ would not have benefited investors in 2020. The S&P 500 experienced a 34% slump in February and March due to the COVID-19 pandemic but returned 12.4% from May to October.
In the decade through 2020, the summer half of the market year averaged a 3.8% return, with no significant declines since 2011, according to LPL Research. Recent data has also highlighted April 2022, where the S&P 500 was down 8.8% and had dropped 13.3% since the year’s start.
| S&P 500 ‘Sell in May’ Returns (May-October) |
| Year | S&P 500 ‘Sell in May’ Return |
|---|---|
| 2011 | -8.1% |
| 2012 | +1.0% |
| 2013 | +10.0% |
| 2014 | +7.1% |
| 2015 | -0.3% |
| 2016 | +2.9% |
| 2017 | +8.0% |
| 2018 | +2.4% |
| 2019 | +3.1% |
| 2020 | +12.3% |
While the historical pattern is evident, its predictive reliability is questionable and could lead to significant opportunity costs.
Alternatives to ‘Sell in May and Go Away’
Instead of taking the phrase at face value, investors who anticipate the pattern’s persistence could rotate from higher-risk sectors to those that tend to outperform during market weakness.
For example, employing a strategy to switch between healthcare and consumer staples stocks from May to October while moving to more economically sensitive sectors from November to April could have markedly outperformed the S&P 500 in both periods from 1990 to 2021.
A real-world embodiment is the Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF, which executes this strategic rotation. For many retail investors with long-term aspirations, however, a buy-and-hold strategy remains optimal, wherein they retain equities year-round unless fundamental changes compel otherwise.
Related Terms: underperformance, Dow Jones Industrial Average, S&P 500, stock market collapse, buy-and-hold strategy.
References
- Stock Trader’s Almanac. “Our Strategy”.
- Fidelity Investments. “Should You ‘Sell in May?’”
- Jacobsen, Ben and Zhang, Cherry Yi. “The Halloween Indicator, ‘Sell in May and Go Away’: Everywhere and All the Time”, 2018, pp. 1-10.
- LPL Financial. “Time to Sell in May?”
- Pacer ETFs. “CFRA Institutional Presentation”, Page 1.
- Pacer ETFs. “Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF”.
- Morningstar. “Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF Performance”.
