Should You Sell In May And Go Away?

“Sell in May and go away” is not just a catchy phrase that happens to rhyme. It is a legitimate strategy for investors, based on historical trends. The idea is to sell stocks at the beginning of May and invest in fixed income, returning to equities at the end of October.

As Bob Pisani points out in this CNBC article, the numbers behind the idea are quite staggering. If, starting in 1950 and continuing until now, you invested $10,000 in the S&P 500 only between May 1 and October 31 each year, you would have $4,138, a loss of $5,862.

If, on the other hand, you had followed the advice to “sell in May and go away” and invested only in the winter months, between November and April, you would show a profit of $2,836,250.

That is almost unbelievable, but before you rush out and sell everything, there are two problems to consider. First, as any financial adviser will tell you until they are blue in the face, past performance is no guarantee of future results. Just because something has worked in the past, that doesn’t mean that it will in the future.

Second, those results come from doing the same thing every year over a sixty-nine-year period, and most of us don’t have investment time horizons that long. Over shorter time-spans, getting it wrong once and missing out on a significant increase in stocks can do enormous damage to your portfolio.

The last few years are good examples. If you had ignored the strategy and simply stayed invested on May 1, last year you would have made 11.4% to this point overall. If, however, you had sold on the first of May, then reinvested at the end of October, just as the market began its year end crash, you would have made only 9.9%.

From May 2017 to October 2018 the S&P 500 gained around 7.7%, but from October to the following May, only around 3%.

 

Times change, and because of that, even the traditional rationale behind the strategy could be said to no longer apply. The theory is that traders and investors essentially take the summer off, resulting in a lack of interest that keeps stocks down. In these days of mobile connectivity though, as anyone who works anywhere is all too aware, being away from your desk doesn’t mean being away from your job.

Given that you are unlikely to be looking at a seventy-year performance record and that recent results are more indicative of what is likely to happen this year, it makes far more sense to look at current conditions when making a decision. If you do that, it is hard to escape the conclusion that selling in May and going away this time would not be advisable.

We are in the middle of an earnings season that, so far, has shown that the economic slowdown that many people felt was occurring in the first quarter was nowhere near as bad as feared. The data for the last three months supports that too, with GDP growth of 3.2%, consumer incomes, spending and confidence all rising, and a jobs market that continues to show strength.

Probably most importantly of all, the Fed, which will announce their intentions later today, has moved back to a dovish stance and indicated that further rate hikes this year are unlikely.

That is not to say that there aren’t problems on the horizon. The yield curve remains inverted, suggesting that a slowdown at the very least is coming at some point, dollar strength will translate to problems for American exporters before too long, and there are also legitimate concerns about global growth.

However, none of those potential problems are likely to surface in the next couple of months, and as we break new ground for the major stock indices, who knows how high we can go? It may be that in six months’ time, stocks will be lower, but the prospects for the next month or two look good enough that selling in May and going away in 2019 makes very little sense.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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