Sell In May? Historical Data On A Market Adage
Summary
- This article adds empirical evidence to the market adage of "Sell in May and Go Away".
- Building off previous academic research, we see that there is seasonality in market returns across geographies, asset classes, and long time intervals.
- While the May-October period has sharply underperformed the November-April period historically, that did not hold last year. Stocks sold off sharply in March 2020 and rallied through the summer.
- A long-term approach to investing is likely a better avenue to building wealth, but the historical seasonality of stock market returns is notable and worth understanding for readers.
For most Seeking Alpha readers, a long-term buy-and-hold strategy, tailored to your personalized investment horizon and risk tolerance, designed to capture equity risk premia over time is advisable. With that disclaimer mentioned at the top of this article, this piece will look at whether tactical positioning via the old adage "Sell in May, and Go Away" is wise advice or folksy nonsense.
Using sixty-plus years of data, dating back to when the large-cap benchmark U.S. equity index first went to 500 constituents, I break market returns into these two semi-annual components. This study yields some surprising results. As seen in the table below, the annualized return for domestic equity investors for the six months from May to October inclusive was a sub-trend 5.2%. Conversely, returns from November to April were an astounding 15.9% annualized.
While this seasonality has held, on average, over this long study horizon, "Sell in May" was a poor strategy in 2020 as the market continued to rally after the historically sharp COVID-related selloff earlier that year. The period between November 2019 and April 2020 (-3.2%) sharply underperformed the performance of the period between May 2020 and October 2020 (+13.3%). The outperformance for the six months beginning in May 2020 was the largest since the recovery from the Global Financial Crisis in 2009. While these are two very salient examples of "Sell in May" not working, we know that it has outperformed historically. The question we will seek to answer is whether this calendar effect is spurious, or whether there is something Seeking Alpha readers should heed.
As I often do when examining market phenomena, I am turning to academic research on the subject, which I will supplement with my own insights. In 2001, Dutch researchers Sven Bouman and Ben Jacobsen published: The Halloween Indicator, 'Sell in May and Go Away': Another Puzzle. The authors found that this timing mechanism held in 36 of 37 developed and emerging market economies in a dataset stretching from 1970-1998.
They found that the effect is particularly strong in European countries and is robust across time. In 2013, Sandro Andrade, Vidhi Chhaochharia, and Michael Fuerst published, "Sell in May and Go Away" Just Won't Go Away". Building on the Bouman-Jacobsen study, the authors found that the "Sell in May" effect persisted with the same economic magnitude from 1998 to 2012. In the United States, the phenomenon persisted for seven of the next eight years before 2020's sharp reversal.
If the market believed that there was an arbitrage to be captured after the 28 years of outperformance in the Bouman-Jacobsen dataset, we should not have seen continued outperformance over the next 14 years through the Andrade, Chhaochharia, Fuerst dataset. There are always strange anomalies in a given dataset, so extending the study to out-of-sample periods adds additional credence. The Bouman-Jacobsen study further showed that this seasonal effect has been in place in data in the United Kingdom stretching back to 1694! For perspective, that dataset pre-dated the birth of George Washington by 38 years.
We know that "Sell in May" has persisted across various time horizons for equity markets. Further support for this market anomaly is seen in currency and credit markets. This suggests that there is seasonality in financial markets' aggregate posture towards risk that is markedly different in these two semi-annual periods.
Why does this seasonality exist and why has it persisted? Perhaps seasonality is induced by vacations. This might suggest that investors have less demand for risky assets when they are away from the office. This possible explanation might explain why the "Sell in May effect" is even stronger in Europe where the summer holiday is longer. There is probably some merit to this calendar effect. I have shown a strong and persistent calendar effect - the so-called Santa Claus effect - in high-yield bond markets in December and January that I believe is caused by a relative lack of primary debt supply in those months, which accommodates holiday schedules. While calendar effects are a violation of the Efficient Market Hypothesis, it does appear that market structure and human behavior could allow for their existence.
Another interesting observation on the seasonality of returns was captured in a 2003 paper by Mark Kamstra, Lisa Kramer, and Maurice Levi of the Federal Reserve Bank of Atlanta. In Winter Blues: A SAD Stock Market Cycle, the authors documented low returns prior to the winter solstice and strong returns following that date. They posit that seasonal affective disorder, a documented medical condition linking length of day to feelings of depression in some people, influences risk-taking and market returns. Adding support to this claim, the influence in the dataset appears stronger at higher latitudes (shorter days in winter) and is present in the Southern hemisphere at a six-month lag (opposite seasons from the Northern hemisphere). Notably, New Zealand, a unique Southern hemisphere developed market, was the only country where "Sell in May" did not work in the Bouman-Jacobsen study.
Maybe "Sell in May" is bolstered by these calendar effects and weather's impact on mood, but these could be simply small variables adding heft to what is simply a spurious correlation in a relatively short dataset. Unfortunately, we cannot wait around for another sixty-plus years of S&P 500 (NYSEARCA:SPY) data to test this hypothesis.
What does that mean for Seeking Alpha readers? While I was surprised at the evidence supporting market seasonality, I am certainly not advocating selling your risky assets and sitting in cash for the next six months. Over this more than sixty-year period, investors who sat out the lower returning semi-annual period would have still sacrificed returns. I think investors, especially young investors with a long-time horizon, should capture equity risk premia over long time intervals as I set out in my article opening disclaimer. Timing markets consistently is a difficult proposition. Digging deeper and investing more in down markets - like the one we experienced early last year - with a long-run view is likely better advice for most investors.
For investors with a more tactical bent to the market, I hope this data was at least thought-provoking. If you want to test a market anomaly, you would want to test it across long time intervals, across geographies, and in different asset classes. As strange as it sounds, the "Sell in May" adage seems to correctly capture an abnormal period of seasonality in markets.
In coming articles, I will offer a switching "Sell in May" strategy and a look at this phenomenon across other markets.
* Calendar year returns begin in the previous year (e.g. 1958 November - April includes November and December 1957 and the first four months of 1958).
Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties, and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
This article was written by
Analyst’s Disclosure: I am/we are long SPY. 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.
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Comments (31)
-of the 25 November-April periods with double-digit positive returns, there were only 4 May-October periods that followed with a negative return.
-of the 10 November-April periods with over 20% positive returns, there were 3 May-October periods that followed with a negative return.
Based on this, odds indicate one should stay invested May-October.
- The May-October time period showed a negative return 27% of the time.
- The November-April time period showed a negative return 20.6% of the time.
- The underperformance of May-October stems very little from the number of occurrences of negative returns, and very much from the magnitude of drops that generally occur in May-October.
- The real mystery is, "Why do big drops, when they occur, almost always tend to occur in September and October?" and "Is there a way to estimate which years that big drop may occur in?"
With my strategy I buy hand over fist during July-August as potential sellers are most often out BEFORE the holiday season to limit risk. What remains is low liquidity / low volatility buying. Could be that there's a sell off after those 2 months because of that.So my Sell In May strategy means reducing risk in May-June-September-October instead.drftr
