Sell in may and go away

What Is Sell in May and Go Away?

"Sell in May and go away" is a well-known market adage that suggests investors should sell their equity holdings in May and reinvest in the fall, typically around October or November. This investment strategy belongs to the broader category of seasonal market anomalies within behavioral finance. The underlying theory is that the stock market historically exhibits weaker performance and lower trading volume during the six-month period from May to October compared to the November-to-April period⁶², ⁶³. Proponents of "Sell in May and go away" believe that by avoiding the "summer doldrums," investors can potentially mitigate risk and improve their overall returns⁶¹.

History and Origin

The origins of the "Sell in May and go away" adage can be traced back to England, specifically London's financial district, in the 18th century. The full phrase was reportedly "Sell in May and go away, come back on St. Leger's Day." Wealthy British aristocrats, bankers, and merchants would leave the city in May to escape the summer heat and enjoy the social season, including horse racing events like the St. Leger Stakes in September. They would then return to their business and financial dealings in the autumn, around the time of the race⁵⁹, ⁶⁰. This practice eventually made its way to Wall Street, where the idea that stocks underperformed between Memorial Day and Labor Day became a common perception⁵⁸. While the original context related to the social calendar, the observed historical data in financial markets seemed to support a seasonal pattern of weaker summer returns⁵⁶, ⁵⁷.

Key Takeaways

• "Sell in May and go away" is a market adage suggesting weaker stock market performance from May to October.
• The strategy advises investors to sell holdings in May and re-enter the market in the autumn.
• Historically, the November-to-April period has shown stronger average returns for the stock market⁵⁵.
• Critics argue that modern markets are less susceptible to such simplistic seasonal patterns, and attempting to market timing can lead to missed opportunities⁵⁴.
• The adage is rooted in old social traditions and has been analyzed as a market anomaly in academic research.

Interpreting the Sell in May and Go Away

Interpreting "Sell in May and go away" primarily involves assessing the historical tendency of equity markets to deliver lower average returns during the six-month period from May to October, often referred to as the "summer months," compared to the "winter months" from November to April⁵², ⁵³. For instance, historical observations on the S&P 500 index suggest that the November-to-April period has seen average gains significantly higher than those from May to October⁵⁰, ⁵¹. Some analyses indicate that stock prices tend to be relatively flat or only modestly positive during the summer period, whereas the winter months often yield more substantial gains⁴⁹.

However, this interpretation is based on averages over long periods, and individual years can deviate significantly from the pattern⁴⁸. The rationale behind this observed phenomenon is multifaceted, often attributed to factors like reduced trading volume as market participants take summer vacations, and a potential slowdown in economic news or corporate activity during these months⁴⁶, ⁴⁷. While this adage points to a notable historical trend, its practical application requires careful consideration, as market conditions are dynamic and complex⁴⁵.

Hypothetical Example

Consider an investor, Sarah, who begins 2023 with a portfolio primarily composed of equity exchange-traded funds (ETFs). Sarah is aware of the "Sell in May and go away" adage.

Scenario 1: Sarah follows the adage.
On May 1, 2023, Sarah decides to sell all her equity ETFs, totaling $100,000, and moves the proceeds into a low-yield cash equivalent, like a money market fund. She plans to reinvest these funds on November 1, 2023.

• If the market, as represented by a broad index, gained 2% from May to October 2023, Sarah's portfolio, held in cash, would not participate in this gain, earning only the minimal cash yield.
• On November 1, 2023, Sarah reinvests her $100,000. If the market then rallied 7% from November 2023 to April 2024, her portfolio would grow to $107,000. Her total gain over the year would be $7,000, excluding the minor cash yield.

Scenario 2: Sarah stays fully invested.
Instead, Sarah decides to maintain her diversified asset allocation and remains fully invested throughout the year.

• If the market gained 2% from May to October 2023, her $100,000 portfolio would grow to $102,000.
• Then, if the market gained 7% from November 2023 to April 2024, her $102,000 would grow to approximately $109,140 ($102,000 * 1.07). Her total gain over the year would be $9,140.

In this hypothetical example, by staying invested, Sarah would have captured the gains from the historically weaker period, resulting in a higher overall return for the year compared to strictly following the "Sell in May and go away" strategy. This illustrates that while the adage points to average trends, strict adherence can lead to missed opportunities, especially given that positive returns can occur even in the "off-season"⁴³, ⁴⁴.

Practical Applications

While "Sell in May and go away" is primarily a historical observation rather than a strict investment strategy, its concepts of seasonal patterns are sometimes considered in advanced financial analysis. Academic research has explored the "Halloween indicator" (the inverse of "Sell in May"), noting that the effect has been observed in various countries and over long periods, though its strength can vary⁴². For instance, a study by Jacobsen and Zhang found the "Sell in May" effect to be pervasive across numerous markets globally⁴¹.

Professional portfolio management and institutional investors rarely implement a rigid "Sell in May" rule due to the complexities and potential costs involved. However, the phenomenon might subtly influence some short-term tactical adjustments or discussions around market sentiment during the summer months, which are sometimes characterized by lower trading volume and reduced liquidity³⁹, ⁴⁰. This period can sometimes lead to increased volatility, as less trading activity might amplify the impact of significant news events³⁸.

Beyond direct application, the adage serves as a talking point when discussing the efficient-market hypothesis, which posits that predictable abnormal returns should not exist. The persistence of such seasonal anomalies challenges this hypothesis. However, for most long-term investors focused on diversification and strategic asset allocation, the practical advice remains to focus on long-term goals rather than attempting to time the market based on calendar patterns³⁶, ³⁷.

Limitations and Criticisms

Despite its long-standing presence in financial discourse, "Sell in May and go away" faces significant limitations and criticisms. The primary drawback is that historical patterns do not guarantee future results, and relying solely on such an adage for an investment strategy can be counterproductive³⁵. While historical data may show that the May-to-October period generally yields lower average returns than November-to-April, this does not mean that summer months always result in losses. In fact, the S&P 500 has typically generated positive returns more than half the time even during the May-to-October period³³, ³⁴.

One major criticism is the risk of missing substantial gains. The market's best days often occur unpredictably and can be clustered closely with its worst days³¹, ³². Investors who attempt to time the market by selling in May risk missing out on unexpected rallies that could occur during the summer, thereby underperforming a simple buy-and-hold strategy²⁹, ³⁰. For example, in some recent years, the market has seen significant summer gains, defying the adage²⁷, ²⁸.

Furthermore, transaction costs and capital gains taxes associated with frequent selling and buying can erode potential profits, making the strategy less appealing for many investors²⁶. Modern markets, with their high-frequency trading, global interconnectivity, and readily available information, are also less likely to be influenced by historical social calendars or reduced summer trading volume as they might have been in previous centuries²⁵. Many financial experts and institutions, such as Vanguard, advocate against market timing in general, emphasizing that staying invested for the long term and maintaining a well-diversified portfolio is typically a more reliable approach to achieving financial goals²³, ²⁴.

Sell in May and Go Away vs. Market Timing

"Sell in May and go away" is a specific form of market timing, but it's important to understand the distinction.

While "Sell in May and go away" provides a simple, calendar-based rule, it embodies the core challenge of market timing: attempting to predict and react to market movements. Most financial experts caution against market timing in any form, including seasonal strategies, due to the inherent difficulty of consistent success and the high probability of missing significant market upside.

FAQs

Is "Sell in May and go away" a guaranteed strategy?

No, "Sell in May and go away" is not a guaranteed strategy. It is an adage based on historical observations that the stock market has, on average, seen weaker returns from May to October compared to November to April¹¹. However, historical performance does not predict future results, and there have been many years where the market performed well during the summer months⁹, ¹⁰.

Why do some people still follow this adage?

Some investors or traders might consider the adage due to its historical prevalence and the observation of lower average returns and trading volume in summer months, possibly linked to holiday periods and a slowdown in market activity⁷, ⁸. For a long time, academic research also confirmed the existence of this market anomaly.

What are the risks of following "Sell in May and go away"?

The main risks include missing out on potential gains during summer rallies, as markets can rise unexpectedly regardless of the season⁵, ⁶. Additionally, frequent buying and selling can lead to increased transaction costs and may trigger short-term capital gains taxes, which can reduce overall returns⁴.

Is there a "buy in November" equivalent?

Yes, the reverse of "Sell in May and go away" is often referred to as the "Halloween Indicator" or "Halloween Effect," suggesting that the period from November to April typically yields stronger returns. This implies buying or reinvesting around Halloween (October 31st)³.

Should long-term investors consider this strategy?

Most financial professionals advise long-term investors to focus on a consistent investment strategy that emphasizes diversification and maintaining a disciplined asset allocation rather than attempting to time the market based on seasonal patterns. Missing even a few of the market's best days, which can occur at any time, can significantly hurt long-term returns¹, ².