Stock Market Seasonality: Sell in May and Go Away

The phrase, sell in May and go away, has been heard in the streets of Wall Street for many years. It is a sharp, disputable expression that suggests that investors should get rid of their stocks in May, and by November, they should already be back in the market. Could this thumb rule in today’s markets maintain its validity, or is it instead an outdated concept now superseded by electronic trading, worldwide events, and the changing behavior of investors?

The current issue will examine this investment behavior’s history, stats, and psychology. Starting from periodic patterns and the performance of individual sectors, we’ll clarify which factors contribute to the period from May to October being highly controversial and whether the pattern is still recommended in today’s economic situation.

What Does Sell in May and Go Away Actually Mean?

The sense of sell in May and go away strategy is pretty much unadorned: liquidate the stocks part in May, spend your summer without being under such pressure to keep abreast of what’s happening in the capital markets, and, in the end, take part in the trading business in November. The ideologists of the system turn attention to the fact that, from a historical viewpoint, stocks have had higher returns from November to April, and lower returns have often characterized the period from May to October.

The expression was popularized through the Stock Trader’s Almanac, which outlined a recurring seasonal stock performance trend. The almanac drew attention to the fact that, to a large extent, equities, particularly those represented by the Dow Jones Industrial Average, have been subject to better performance over a period ranging from winter to spring and, in parallel, worse over a period ranging from summer to fall. 

Does History Support This Strategy?

Let’s check the numbers. The S&P 500 has gained only around 3% from May to October since 1990, compared to a massive 6.3% from November to April. This information appeals to many investors and researchers who have become ardent followers of the idea.

On the other hand, if we pull out and observe the enormous scope of the sales in May and look away from the stats, we’ll see that it has not always been the case that the summer has been the weaker half. In the 1930s and 1940s, the S&P 500 produced higher returns in the summer than in the winter, contradicting the propaganda above and proving that stock market seasonality is much deeper than a mere summertime adage.

The Roots of Stock Market Seasonality

So, which factors create this regularity? It is said that most of the blame goes to how the investors and institutions behave. The calendar-based movements in the market are the low trading volumes during the summer holidays, the fiscal year-end selling in October, and the rebalancing in November. These shifts represent stock market seasonality by month.

People’s psychology can also make them less involved with the market in summer, leading to less risky actions on their part. On the other hand, it’s a familiar story that investors do not move when the earnings season is on and there are political uncertainties around. In each case, your sum boils down to a stagnant market.

Breaking Down the Seasonal Trends

The data of the recent decades confirm that the months with the stock market making the most money are still more or less unchanged – they are still situated between November and April. The most interesting aspect of these months, particularly November and December, is the high level of consumer spending, holiday celebrations, and good news following the strong financial performance.

On the contrary, the market often registers its worst months in September and occasionally May. The lowest average returns were shown in September, which was historically the case, so it appears to be a consistent lousy patch for the market.

The question then becomes, What is the worst month for the stock market? The statistics indicate that September is often this month. Although May’s performance is not so bad, it is not as consistently poor as September’s.

The Other Side: When Summer Surprises

Though the sell in May and go away phenomenon is common, don’t forget that many exceptions exist. The summer has been an excellent time for the stock market for the last few years. For example, despite the pandemic, the S&P 500 index did not decline and increased by 24% from May to October 2020.

The summer of 2009 had a return of 21.9%. Conversely, winter dropped more to a loss of -9.4%. These situations illustrate that absolute compliance with this principle could produce the opposite effect, making the investments miss the potential for upward movement.

Alternatives to Going Away

Instead of selling out, investors are encouraged to rotate their sectors in the market. The consumer staples and healthcare sectors were the best-performing sectors during the stock market’s summer. From 1990, a report by CFRA noted that these sectors went up by an average of 4.1% from May to October while the rest of the market was lagging.

This is the main idea in developing ETFs like the Pacer CFRA-Stovall Equal Weight Seasonal Rotational ETF, which was designed to match the strengths of the sectors in favor at that time. Nevertheless, despite having such advanced models, the S&P 500 is still the market leader among the seasonal ETFs in the long run.

Is Buying in May a Good Idea?

Some investors are the opposite of the market majority by using the sell in May, buy in October rule of thumb, which is a one-off bet against the majority. They think the market’s awareness of a seasonal tendency weakens it, making it ineffectual. If everyone anticipates a slump in May, this might cause them to sell in April beforehand, which will water down the actual downturn.

Others are more opportunistic and see a decrease in volatility and commodity prices as a good entry point to the market. They are the ones who buy undervalued, high-quality stocks.

Time in the Market vs. Timing the Market

One of the prevalent criticisms of the sell-may-go-away method is that it encourages market timing—a task notorious for being extremely hard. Even the most seasoned financial experts find it difficult to predict their entries and exits better than an unchanging buy-and-hold investor.

Charles Schwab performed a study over 20 years, during which they studied some different investment strategies. Regardless of perfect market timing, those who decided to stay with the S&P 500 throughout were left with almost the same amount of wealth as those who succeeded in timing the market; consequently, time in the market proves to be more effective than timing the market.

The Problem with Transaction Costs

Linked to the first point, trading according to seasons requires incurring expenses. Constantly putting money into dividends and sales involves a lot of transaction fees, capital gains taxes, and other logistical implications. In the long run, these transactional costs hide the returns derived from investments, including the case of relative ease in long-term investments.

One example is the passive index funds, such as those tracking the S&P 500, with very low fees of around 0.05%. However, seasonal ETFs or active trading strategies may charge over 0.60% annually. When considering tax matters, the real-world profitability of selling in May suddenly becomes far from what it was thought to be.

Presidential Elections and Seasonal Trends

Remarkably, the regular fluctuations in the economy connected with changes in presidents can change seasonal patterns. For instance, statistics indicate that the S&P 500 usually goes up from April to October in about 78% of presidential election years, whereas in non-election years, this percentage is 64. The fact that this behavior occurs makes it even more difficult for the market to sell in May and go away.

What Is the Best Month to Sell Stocks?

This question depends on your objectives. If you’re looking for the season’s peaks, April and November have been the best months to sell stocks from a historical viewpoint. However, making investment decisions based only on the calendar can be risky.

According to most market gurus, investors should employ the calendar, technical analysis, fundamentals, and market sentiment. For example, selling in April to stay away from the May decline may work in some cases. While in others, holding shares during the summer could be better.

Seasonality in the Nasdaq and Other Indexes

Besides, it’s not only the S&P 500 and Dow that are affected by the change of seasons in the 

economy; there are other indexes with different seasonal behavior. As far as the Nasdaq is concerned, November has consistently been its strongest month. The Russell 2000– a small-cap stock-based index–tends to give a greater return in January, which confirms the existence of the January effect.

Can the characteristics usually tied to summer coincide with those linked to the election year, ensuring the same approach can yield the best result? These are questions that seasonality tries to answer, and not one from a strictly defined range of possibilities.

The Psychology Behind the Pattern

How come these patterns persist? You will be surprised to know that the answer to this question lies in human nature. The behavior of investors exhibits regular tendencies typical of humankind; for example, they flock towards the familiar concept of a haven during the markets’ low seasons or election years. Earning seasons and Q1 data strength are also very significant, as they lead to the emergence of high spirits, especially after a good number of clients have been added to the pool.

This group behavior makes the seasonal principles stronger. However, their ability to predict is reduced if more investors rely on them for action, which is called the self-defeating prophecy effect.

Why You Might Stay the Course

Even though historical data is quite convincing, most analysts declare avoidance of seasonal trading and rely on other solid alternatives, such as a diversified and disciplined strategy, as the best method to make a profit. Investment in index funds, dollar-cost averaging, and reinvesting dividends helps the market perform upward over a longer period.

Yes, it is hard to resist timing the market, mainly when supported by the sell-in-May and go-away statistics, but history and math show that sticking to your investment usually pays off.

In Conclusion

Sell in May and go away is a phrase that invariably sparks discussion every springtime. Figures tell us that the May-October stage is usually the worst, but there have always been some exceptions. If one were to go along with this conventional adage for the rule’s sake, there exists a great chance that he would miss out on financial opportunities to make the most of juggernaut rallies and compound the gains.

Do not lose money and harvest the opportunity by moving to a more stable sector, reducing costs, and deciding on a long-term plan. There is no doubt that there is such a thing as seasonality, but also the truth that the benefits of patience and consistency cannot be overstated. After all, knowing is helpful, but following unthinkingly may lead to regret insofar as poor performance in most cases.

Undoubtedly, there is no getting away when it comes to investing. However, a well-informed strategy (whether one would want to consider it a seasonal strategy or not) gives you an advantage in the market rather than merely deciding to sell in May and go away.

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