A Sell In May Strategy
- Market returns have demonstrated strong seasonality, rising from November to April and then producing modest returns with higher variability between May and October.
- This article looks at a simple strategy that owns stocks from November to April and then owns Treasuries from May to November.
- While this strategy holds stocks half the time, it strongly outperformed the S&P 500 with lower variability of returns.
In a recent article, I took a deeper look at the old market adage of "Sell in May and Go Away." The article demonstrated that equity markets globally have experienced meaningful seasonality with returns from November to April far higher than between May and October. This phenomenon has held in developed and emerging economies globally over very long time periods, meaning this persistent calendar effect has not been arbitraged.
As the calendar flips to May, examining this market axiom seemed prudent. I decided to examine a strategy that held the S&P 500 (NYSEARCA:SPY) from November to April and long duration U.S. Treasuries (NYSEARCA:SPTL) during the period from May to November. Using data dating to 1973, the longest dataset I had for long Treasury returns, I found that this bi-annual switching strategy has generated structural alpha.
The results are fairly striking. This 1973-2017 time frame was a great period for U.S. stocks, which produced annualized returns of just over 10% over the sample period. The seasonal U.S. equity/long Treasuries strategy did even better, producing a 13.5% annualized return. As one would expect for a strategy that owned Treasuries half of the time, the switching strategy also produced less variable returns.
The annualized return from the Sell in May and Buy Treasuries portfolio was 13.5% with a standard deviation of annualized returns of just 14.4%. The strategy beat the S&P 500, which it owned for half the time, by 3.1% per annum and did so with suppressed variability. These are gross returns that are assumed to be held in a tax deferred account or vehicle and are shown before the small transaction costs of a twice-a-year switching strategy.
While the S&P 500 produced a -37% return in 2008, the Sell in May and Buy Treasuries portfolio was just -11% in 2008. That switching strategy was in Treasuries during the Lehman bankruptcy and the market swoon in the fall of that year. The "Sell in May" strategy posted its worst year in the stagflationary environment of 1973 at -15.9%.
Over this 40-plus year period, the results become fairly astounding. The graph below shows the cumulative return of the Sell in May and Buy Treasuries Portfolio, a Long Treasuries portfolio, and the S&P 500.
In my related article, I described some previous academic research on this phenomenon, which highlighted summer vacations and even seasonal affective disorder as potential causes of this calendar effect. While this "Sell in May" seasonality has held across many markets over long time intervals, it could certainly be a spurious correlation that will reverse over even long time intervals.
Remember that last year the S&P 500 produced a positive return in every month of the year, including the dreaded May to October time frame. Equity markets have still posted positive returns on average, in this weaker semi-annual window, it is just that stocks have generated much more of their return in the November to April. It is difficult to dismiss any strategy that has beat the market by 3% per year with less variability, which is why I highlight the strategy in this piece. Long-term investors should still simply be trying to capture the equity risk premium over long-time intervals, even if this demonstrable calendar effect suggests that much of that return will come, on average, from November to April.
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