Spring has arrived, which means you will hear the phrase “Sell in May and Go Away” repeated daily by the financial media. This sentiment comes up every year and we expect if you have not heard it yet, you will soon.
Equity markets have been seeking direction in 2016, selling off in the first six weeks of the year and subsequently recovering. You may have recently heard the U.S. is in an earnings recession and stocks are overvalued. A quiet period for financial news is around the corner. First quarter earnings season has effectively ended with disappointing results, the Federal Open Market Committee is not scheduled to meet again until June, and most would concur we are in a slow cycle for impact economic data. The media is searching for content during this slower time period.
What does this mean for your investments and how should you respond?
Our clients understand we are not in the business of forecasting weekly or monthly performance. Savvy investors know this is impossible. Further, our clients know better than to deviate from their plans based on financial media.
The majority of media advice is driven by short term thinking. If you have a long term strategy most of the media noise should frankly be tuned out. Our team could provide a half dozen reasons why short term trading is not a suitable long term strategy, however the intent of this writing is to address both the headline topic and factual data used to support the viewpoint.
- The month of May has delivered positive returns more often than not: If we simply look through the lens of the S&P 500, from 1928 to 2015 the index generated 49 positive returns and 39 negative returns
- A historical performance gap does exist when comparing the six-month period from May-October against November-April. This historical comparison is the basis for the infamous “Sell in May and Go Away” phrase. The range of returns for the May-October period fell between 1.3 percent-2.1 percent, while performance for the November-April cycle varied from 5.1 percent-7.1 percent (Variance in returns were determined by the starting date in the analysis and whether the mean or median return was calculated). Our team is less concerned with delivering the minutia behind the calculations and more interested in presenting evidence to support a point.
The data above leads to a few general conclusions: May has delivered mediocre investment results, yet has offered positive returns with greater frequency than negative returns. The six-month period from May to October has significantly underperformed the subsequent six-month period from November to April.
Let’s return to the question: “Should you sell in May?” Our response is no, and here are the reasons why:
- While the period from May to October has underperformed, the bottom line is performance has still been positive.
- Successfully implementing the strategy to maximize results, would require timing the market perfectly twice. Market timing is a dangerous game. Missing any or just a few of the top performing days of the year can be the difference between a positive and negative annual return.
- The impact of taxes and trading costs must also be considered; neither of which are typically mentioned when the strategy is discussed.
- Sell in May and Go Away is an approach typically used in reference to the S&P 500. A properly diversified portfolio invests in multiple asset classes; several of which have historically performed very well from May to October.
- Past performance is not indicative of future results and correlation is not causation. While the period of time evaluated is representative of a reasonable length of time, we have no assurances the trend will continue into the future.
Many theories exist in an attempt to justify the performance discrepancy among the two intervals. Equity markets often experience large cash inflows from institutional investors in the month of January. The United States is a consumer driven economy, November & December holiday spending may fuel optimism. Summer months tend to be light on economic data, creating an environment ripe for panic and fear mongering. All of the above may contribute to the disparity in results.
Our advice to our clients is not to sell securities and raise cash. We acknowledge U.S. stocks are slightly expensive, and have underweighted domestic equities in client portfolios. While valuations are elevated relative to long term historical averages, they are not extreme. In fact, most sectors are trading below their 20 year averages. Foreign stocks have become inexpensive by most measures. Alternative investments provide investors an opportunity to achieve returns expected to exceed traditional fixed income, while offering less volatility in comparison to equities.
Should I sell in May and go away is a reasonable question that comes up every spring. We welcome the opportunity to discuss the concept further if you have questions or concerns.
Please remember the financial media delivering this message does not know your individual goals, tax bracket, tolerance for risk, or other personal circumstances. Your financial advisor should if he or she is performing their job properly. Stay the course and stick to your plan. If you’re unsure what your plan calls for—maybe now is a good time to check in with your advisor.
 Accessed via URL https://www.fidelity.com/viewpoints/active-trader/sell-in-may; May 2, 2016.
 Sonders, Liz Ann; Sign O’the Times: Sell in May and Go Away?; April 25, 2016. May 2, 2016.
 As measured by both forward and historical price to earnings ratios. J.P. Morgan, Guide to the Market, March 31, 2016; accessed via URL: https://am.jpmorgan.com/blob-gim/1383280028969/83456/jp-littlebook.pdf; May 2, 2016.