The Independent Market Observer

Don’t Sell in May and Go Away

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 29, 2021 3:01:50 PM

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sellAs we approach the summer months, there are a lot of reasons for investors to be worried: inflation, taxes, the deficit, and on and on. I am hearing quite a bit about reasons not to be cheerful, some of which we’ve talked about in other posts. But because of where we are in the calendar, there is one more making the rounds—the old market chestnut “sell in May and go away”—that I want to talk about today. The short response to this adage, for readers in a hurry, is “don’t.”

Reasons to Sit Tight

Why? First, markets still tend to go up in the summer. According to a recent newsletter from Bespoke Investments, over the past 20 years, the S&P 500 has gone up 1.5 percent from May to October. That’s not as good as the rest of the year, but it is still a win. Second, selling creates additional problems. Taxable accounts will pay on the gains, and you now have the problem of deciding when to reinvest.

Beyond these specific (and, in my mind, sufficient) reasons to sit tight, there are also more general ones. First, the economy and corporate earnings are likely to keep improving over the next couple of quarters. It makes little sense to bet against the market in those circumstances. More than that, however, this kind of calendar-based numerology is simply based more on a good story than anything else.

The Story of the Summer Investor

In this case, the story is that, in the summer, investors are on vacation—likely at the beach. There is truth to this, and I have written my share of lobster roll posts from the beach. But the notion that no one is paying attention, or investing, is false. But because there is some truth here, sometimes the story looks to be true and works. And sometimes it doesn’t. There is no consistent effect.

As an example of how weak the effect is, over time, look what happens if you shift the focus by one month. When you shift from being in for November to April and out from May to October to being in for June to December and out from January to May, the effect vanishes. As such, the real problem may be the month of May itself, although that doesn’t really work either. At the end of the day, no matter what data set you look at, over time, you do better overall by simply staying in, rather than trying to move in and out.

Which brings us to the question of how the story and the adage got started. There are a couple of possibilities. As a Wall Street adage, it started there, possibly to give the traders on the Street a rationalization for those summer vacations. Second, if you look at the data, over some periods, it does work. But the major contributor to this idea, especially in recent decades, is some well-known October crashes. Obviously, those will weigh on returns. If you missed them, for whatever reason, you would have done better. In recent years, it has been more about a handful of extraordinary events than a fundamental pattern.

Investing Isn’t About the Calendar

And that is the real problem here: this kind of simplistic calendar-based analysis misses what really controls, which are fundamental factors. Another good example is the seven-year market cycle that I discussed here. Investing really isn’t about the calendar; it is about real economic factors. You can make rational decisions based on those factors. You can’t make those decisions based on the calendar.

Is that to say things will be great from now until November? Of course not. Although I do think conditions are favorable, there are a number of risks we have to deal with. That is, however, always the case—and those risks have nothing to do with the calendar.

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