Sell in May and Go Away? History May Suggest Otherwise
With 2022 in our rearview, and market volatility continuing as risks to the global economy remain, investors remain cautious. With May 2023 in sight, the old adage goes, “Sell in May and Go Away,” the stock market theory that the stock market underperforms in the six-month period between May and October, relative to the period November through April. The investment strategy’s premise around the theory is to sell stocks at the beginning of May, hold proceeds in cash, then reinvest in November through April, and repeat.
As an investor, the strategy leaves you with the possibility of short-term capital gains tax consequences, depending on the account type. As a financial advisor, the strategy utilizes market timing, which realizes a byproduct that we cannot control: actual market performance.
It left me wondering: How has the market performed under that premise over the last couple of economic cycles (Recessions in 2008, 2020)? Also, why would one avoid the period of May through October, if on average it provides positive rates of return? Missing out on market performance in exchange for potential short-term capital gains tax consequences is formula for hindering long-term investor returns.
To explore this question, we took a look at the S&P 500 as our proxy for the stock market. Below is the price movement, exclusionary of dividends, since 2008, taking the last business day of May’s close price, dividing by the close price of the last business day of April (proxy as starting price before market open for May 1st) and subtracting 1 (100%) to solve for percentage amount:
For the same time period, using the close price from the last business day from October divided by the close price in the last business day of April, below is the data;
What Does the Data Tell us?
Through 15 years of data, including two recessions (2008, 2020), we experienced 4 down & 11 up periods for the month of May. The range of these returns were -8.20% to +5.31%, with a median return of +1.07%. If history were to repeat itself based on these odds, the odds of a negative May 2023 are 4 out of 15 or 26.67%.
Consequently, over the same time period, we experienced 5 down & 10 up periods for May-October. The range of these returns were -30.08% to +18.72%, with a median return of +2.95%. If history were to repeat itself based on these odds, the odds of a negative May-October 2023 are 5 out of 15 or 33.33%.
In either scenario, if history repeats itself, based on the data sets, you have at least a 66.67% of a positive outcome. While history is not indicative of future results, as a long-term investor, you need to ask yourself the question; which side of probability equation would I prefer? Statistically, evidence would suggest that one would be better off over the long-term to maintain the equities in their portfolio as-is, in accordance with their risk tolerance. The historical data is a reminder to us as investors that “Sell in May, Go Away” that is strategy that likely originated from those trading stock short-term, and not invested for a long-term purpose.
S&P 500 data source; Yahoo Finance – https://finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC
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