Spring has always been one of my favorite seasons, and after a particularly cold and long winter, I’ve been especially excited for Spring this year. However, being in the investment industry, there is one aspect of the season that always pesters me. Usually, in the waning days of April, a bunch of headlines appears warning of the old wall street adage “Sell in May and Go Away.” Just like the occasional (hopefully) dandelion distracts a gardener from all the glory of the spring blooms, the “Sell in May” articles often distract investors. I was actually optimistic last week that this year would be different because I hadn’t seen many “Sell in May” articles pop up or any investors or clients mentioning it. But alas, that ended this week, with no fewer than a dozen pesky sightings in the last few days. So now I feel compelled to give it at least a quick address.
What is “Sell in May” referring to?
“Sell in May” comes from the old seasonal Wall Street adage “Sell in May and go away, come back on St. Leger Day” and basically refers to the 6-month period from May through October, also known as the “worst 6 months” of the year for stocks. For those curious St. Leger Day marked the date of an English horse race usually run in the second week of September (that’s how old the maxim is).
Does “Sell in May and Go Away” work?
Well historically it is true that 1) during the summer months the probability of a truly bad month is higher than the November to April periods, 2) the probability of a really great stretch of months is lower in the summer months than in the winter months, and 3) the variability, or standard deviation, of the summer months, is greater than the winter months. So technically, in that context, May through October is the “worst 6 months” of the year historically.
Nevertheless, the overall historical returns for May through October are still positive and the historical odds that May through October has been positive is more than 70%. So, you may very well be selling in May just to buy back higher in six months. But “Sell in May and buy back higher later” doesn’t exactly roll off the tongue and wouldn’t attract nearly as many eyeballs and clicks.
Okay, so why have investors been anxious about the summer months more?
Despite the winter months having some advantage in returns and odds for positive results than summer months, the summer consternation is likely more the result of emotional reactions resulting from more material corrections and rallies:
- Market rallies (i.e. gains of 10% or more) have occurred more frequently in the winter period.
- Market corrections (i.e. losses of 10% or more) occurred more often in the summer period.
It is no doubt exacerbated from just a few of the worst market events that occurred in the summer months such as the 37% drop in the summer of 2008, Black Monday’s 22% crash on October 19, 1987, and the 20% bear market in 1974.
What is often overlooked is that the more current the period examined, the less advantage the winter months have over the summer months. As shown in the table below, on a total return basis, both six-month horizons for the S&P 500 have been positive and relatively close, especially on a median measurement, for the last 5 calendar years. And the summer months have actually been less volatile over the last 5- and 10-year calendar periods.
With the market already up 17% this year, hitting all-time highs, and we are on pace to hit the longest economic expansion ever this summer, maybe this is the year to sell in May?
The answer, as it always is when being asked about the future direction of any asset price, is “who knows?” But again, looking at the table, for the 10 years since the financial crisis, both the Nov-Apr and May-Oct periods have each only had a single negative instance, and total 6-month average returns of 8.1% and 5.3% respectively.
As for all-time highs, the S&P 500 just went 148 trading days without one prior to hitting a new high last week. Historically when the index goes at least 148 days without an all-time high and then makes a new one, 93% of the time it was higher a year later.
Well, what should an investor do if a dated, generic Wall Street axiom isn’t the best financial advice?
Clearly, I’m leading the witness now. But seriously, rather than react to a simplistic and dated market adage, why not consider treating this calendar period like any other calendar period and instead focus on more relevant and thoughtful information that pertains specifically to your individual financial goals and objectives. Really, does the calendar know or care about your personal goals and objectives? Are you a trader or an investor? Is your time horizon, and the invested capital associated with it, only six months or meaningfully longer?
Perhaps the most important question to ask is: do you have a thoughtful, relevant financial plan and investment strategy to achieve your life’s ambitions? Hopefully, the answer to that is yes, and if so, perhaps now is a good time to check on it if you haven’t done so in a while. As our Chief Investment Officer, Chris Osmond, recently suggested, perhaps use the gains this year to rebalance to your intended risk levels and exposures. After all, the advances in certain asset classes have resulted in some rather large relative deviations over a relatively short time thus far in 2019. For instance, the S&P 500 is up more than 17% this year (over 18% with dividends), while emerging market stocks have returned about 12% and U.S. bonds are up less than 3%. Even within asset groups, some material deviations have developed, mid-growth stocks are up nearly 25% while mid value stocks are up 18%. So, it may be a good time to course-correct according to your intended plan.
If, however, you don’t have a financial plan or investment strategy that considers your personal goals, objectives, risk tolerances and time horizons the best thing you can do this May is start on one, or find a fiduciary advisor that can help you establish one. Let us know if we can help.
Chris Bouffard is the managing director, wealth management of Prime Capital Wealth Management.
The preceding commentary is (1) the opinion of Chris Bouffard and not necessarily the opinion of PCIA, (2) is for informational purposes only, and (3) should not be construed or acted upon as individualized investment advice. Past performance is no guarantee of future results. Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”).
Chris joined PCIA as Managing Director of Wealth Management in February 2019, where he is intimately involved in the development and evolution of Prime Capital Wealth Management’s business strategies. His responsibilities include developing the Prime Capital Wealth Management brand, its go-to-market strategies, overall investment philosophy, wealth management service offerings, lead generation functions, and advisor/client communications strategies.
He is a CFA charterholder, a member of the CFA Institute, and a member, as well as Past President, of the CFA Society of Kansas City. Mr. Bouffard graduated from The University of Vermont.