"Sell in May and go away" is an investing adage that suggests an investor sells stocks ahead of the summer months. But why would an investor sell at this time of the year? Is there any relevance to this? Read on to learn the meaning and history behind the idea of selling in May.
Meaning Of 'Sell In May And Go Away'
"Sell in May and go away" is an investing adage that says an investor can improve annual returns by selling stocks in May and not reinvesting until November. The adage refers to seasonal stock market performance where the summer months have historically averaged lower returns compared to others.
The history of the adage is rooted in some of the worst stock market crashes in history, which occurred between May and October, including the Wall Street Crash of 1929 and Black Monday in 1987. In the past 30 years or so since then, stock market returns have averaged mostly lower from May through October, compared to November through April.
'Sell And Go Away In May' Statistics
Investors seek patterns and identifying seasonal trends is one example of this. Similar to other recognized performance patterns and theories, such as the Halloween Indicator, the Santa Claus Rally, and the Presidential Election Cycle Theory, there are statistics and trends that support selling in May.
'Sell in May and Go Away' statistics include:
- The three worst days for performance in stock market history occurred in October, two of which were during the crash of 1929, and the other was the 1987 Black Monday crash.
- From 1990 to 2022, the S&P 500 has returned about 2% from May through October, while November through April has averaged about 7%.
- A 1998 study on SSRN found that the selling in May and staying away through October strategy held in 36 out of 37 developed and emerging market economies from 1970-1998.
- A 2013 publication in the Financial Analysts Journal noted that selling in May persisted from 1998 to 2012.
- The period of 2013 to today has not been as consistent, especially considering the sharp reversal of the trend in 2020, when the jumped 46% in price from March 23 to November 1, 2020.
Stock Market Summer Slump
The stock market summer slump refers to a seasonal decline in trading activity during the summer months, which can at times create a low-volume, low-return environment. This seasonal trend aligns within the 'sell in May and go away' adage that points to lower average returns for stocks between May 1 and October 31, compared to November 1 through April 30.
'Buy In October And Sell In May' Strategy
An alternative and related strategy to 'sell in May and go away' is known as the Halloween Indicator, which suggests that investors return to the stock market after the end of October, coinciding with Halloween. After holding stocks through April, the investor would then sell May 1 to complete the cycle.
Self-Fulfilling Prophecy And Opportunities
Seasonal trends are not consistent and investors are wise not to rely on them to determine the timing of stock trades. There is never any guarantee that history or historical trends will repeat themselves. Investors may wish to rely simply on their own investment objectives and risk tolerance to lead investment decisions.
In some cases the Sell In May adage may be self-fulfilling, with investors avoiding jumping into new opportunities during the summer months, no matter how appealing these opportunities are. In other cases, going against the grain could offer opportunity for contrarian investors. For example, if a barrage of investors sell out of their holdings as May approaches, there may be terrific bargain opportunities on offer.
See here for information on average stock market returns.
Is 'Sell In May' A Good Strategy?
The 'Sell in May' strategy has worked many years in the past but it is risky to follow any past trends blindly. There's no guarantee that certain trends will sustain themselves. Furthermore, some of the most savvy investors are those who capitalize on knowing what other investors are likely to do by doing it before them, or taking advantage of their expected actions.
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