‘Sell in May, and go away, and don’t come back until St Ledger’s Day.’
The traditional stock market adage suggests that markets struggle for direction over the summer months. This held true perhaps in a more genteel age, when the City and Wall Street decamped to the races and their country houses. Now, activity goes on all year. Is it still a good idea for investors to avoid the summer months?
Research suggests that abandoning the market over the period from May to early September would cause investors to miss out on an average gain of 1.5%. Compounded over the years, this would eat into returns significantly, even before adding in the costs of selling and then buying back holdings.
The data is skewed by some years when performance in the summer was poor. For example 2008, 2010, 2011 and 2015 all saw rocky periods for global markets. But these are the exceptions. Instead, investors risk selling in May and buying back higher in September and October. When dividends are included, the idea looks even less attractive.
Over the past 20 years, August and September have been weaker months for the S&P 500, down 1.2% and 0.8% on average respectively. The strongest months on average are the final three of the year, but March and April are also strong performers. In the past five years, the effect is even weaker, with the market moving higher in Q1, pausing at the beginning of Q2, rallying more into Q3 and then going into overdrive in Q4.
In short, the old adage is probably obsolete. As the market moves further into its secular bull market (defined as beginning in 2013 when it took out the previous record highs), dips will occur along the way. But blindly selling in a given period based on an old aphorism is probably not the best idea.