Seeking Alpha

May, The Silly Season, Is Upon Us

|
Includes: DIA, QQQ, SPY
by: Larry Swedroe
Summary

The sell in May and go away strategy is just another in the long list of investment myths.

It is true that stocks have provided greater returns from November through April than they have from May through October.

It is also true that since 1926, there has still been an equity risk premium from May through October.

One of the more persistent investment myths is that the winning strategy is to sell stocks in May and wait to buy back until November. While it is true that stocks have provided greater returns from November through April than they have from May through October, since 1926 there has still been an equity risk premium from May through October.

This is not a novel idea in the world of investing. People have been agreeing to this adage for some time. In fact, a few years back, I decided to test this theory by creating two portfolios. The test went as follows:

  • One buys the S&P 500 Index on January 1, 1926 and holds the position through April 30, 1926.
  • On May 1, 1926, this stock position was swapped from the S&P 500 to 30-day U.S. Treasury bills.
  • On November 1, the T-bills are sold and the proceeds invested in the S&P 500 Index.
  • The process is repeated every May and November, ultimately ending with data from October 2012.

The results were not surprising considering the arbitrariness of the idea itself. From 1926 through 2012, the "Sell in May and Go Away" portfolio produced an annualized return of 8.3 percent. However, compare this to the return of the S&P 500 Index, which produced an annualized return of 9.8 percent. And that's even before considering any transactions costs, let alone the impact of taxes (you'd be converting what would otherwise be long-term capital gains into short-term capital gains, which are taxed at the same rate as ordinary income).

The table below shows the returns of the S&P 500 Index for the last five May-October periods, a period when Treasury bills provided almost no return at all.

Period

S&P 500 Index Return (%)

May 2009-October 2009

20.0

May 2010-October 2010

0.7

May 2011-October 2011

-7.1

May 2012-October 2012

2.2

May 2013-October 2013

11.2


Note that the average return for the five six-month periods was 5.4 percent, an annualized return of about 11 percent, or greater than the historical return of the S&P 500 Index.

What does this next six-month period have in store for the market? Unfortunately, my crystal ball, as always, is cloudy, as is always the case. However, I do know that the most basic tenet of finance is that there's a positive relationship between risk and expected return. To believe that stocks should produce lower returns than Treasury bills from May through October, you have to believe that stocks are less risky during those months - a nonsensical argument. The sell in May and go away strategy is just another in the long list of investment myths.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.