Contributor Since 2010
Sell in May and go away. You hear it all the time, year after year as we get closer to the summer. Turn on CNBC and you hear the hosts constantly mentioning "Sell in May and go away" - like it's been pre-programmed into each one of their heads. "Don't worry about the facts, just tell the story." Or go to a financial website and you can't help but find an article talking about the same strategy. But the thing lacking in the arguments are facts.
Some of you may remember Sergeant Joe Friday of Dragnet, who's favorite line in interviewing somebody was "Just the facts, Mam". So, I decided to pull historical data from 1988 to present (6 previous election cycles) and look at monthly returns for the S&P 500 to try to determine if there has indeed been a trading pattern from which we can learn and profit (or avoid loss).
But before I give you my findings, a few caveats. This is HISTORICAL DATA (said very slowly). History is not always representative of the future. I have based my findings on the S&P 500 as a representation of the broad equity market. I'm using averages and CAGRs; the market has a huge standard deviation from those averages so the swings can be very material. In other words, these are facts and probabilities. That's all. There is no guarantee that the future will emulate the past.
OK so here we go. First, my conclusion; you might not really want to sell in May. But June, now that's a different story. So I guess technically if you sold on the last day of May, you are selling in May…
I have cut the data a number of different ways and I am going to give you the highlights. For me, my baseline was - was the index up or down in a particular month? If it was up, it's a good month. Here are some interesting tidbits from my findings before I give you the numbers:
OK, enough with the tidbits. Let's go to the meat of my findings and my conclusions.
1. Yes, there is clearly a pattern and the numbers favor sitting out the months of June through September. However, there is a funny quirk in the numbers. Even though September has historically had a 50% chance of being a down month, in years where August is down, September has often been up.
2. If you invested January thru May, sold, then invested October through December, the CAGR for the last 24 years is 10.40% compared to a CAGR of 9.45% for investing the whole year. Factoring in commission costs and timing issues, it would be about a wash or slightly better.
3. The CAGR for June thru September has been about -.83%. So again, unless you could sell and invest the proceeds in a riskless, income producing security, the numbers say it is close to a wash after commissions.
4. During the 7 periods from June thru September where the market was down, the average drop was 13%! So when the market does drop in the summer, it really drops. The average annual gain during that period for up periods was 5%.
5. You definitely want to be in the market for the final quarter of the year.
So boiling it all down, I conclude that if you want peace of mind, you should sell at the end of May and not come back until the end of September. Interestingly, the historical probability actually favors the fact that the market will be UP during that period (71% of the time). However, if the market goes down, it really hits hard. And this I believe is why there is so much talk of sitting out the summer. Especially considering that in the most recent history (2010 & 2011), the market had tough summers. If you in fact are disciplined enough to do this year-in and year-out, over a long period, odds seem to favor that it will produce equal or better returns than staying fully invested through the whole year.
Now there are other ways to maintain exposure and potentially cut your risk during the summer but I won't get into that in this article.
Following is a summary of some data broken down for you to analyze. I'd be happy to go into more detail with anybody that wants to contact me. (www.forzainvestment.com)
So next time you hear the talking heads asking "Do we sell in May and go away?" You can say you know "Just the Facts".
Historical Returns for the S&P 500
For the period 1988-2011
Jan - May
Oct - Dec
May - Sept
June - Aug
June - Sept
Source: ycharts.com monthly S&P 500 Returns