'Sell in May and go away': Is the tradition worth following?

What is the ‘Sell in May and go away’ strategy?

As spring begins to turn to summer, investors find themselves pondering the classic question: Is it time to ‘sell in May and go away’?

This saying refers to an alternative trading approach where investors sell their equity holdings in May and focus on other financial products before re-entering the stock market in November.

The ‘Sell in May and go away’ strategy is based on the historical trend of stocks underperforming in the six months from May to October, with more impressive performance in the November to April period.

Origin of the ‘Sell in May and go away’

The strategy gained traction thanks to the Stock Trader's Almanac, which noted that since 1950, investing in stocks from November to April and switching to fixed income for the remaining months of the year often resulted in steady returns with reduced risk.

The concept really took off after the market downturns of '87 and '08 and became synonymous with the concept of the ‘best 6 months of the year’. According to historical data, those six-month periods from November through April typically boasted the strongest performance. Hence the advice: ‘sell in May and go away’, with a suggestion to come back in November.

However, like with many market theories, reality doesn't always align neatly with historical trends. Stocks, more often than not, tend to climb steadily throughout the year, making the idea of selling in May seem somewhat old-fashioned. Nevertheless, some investors still swear by this calendar-based strategy.

Contrasting stock performance across seasons

Recent years have shown a noticeable divergence in performance. For example, since 1990, the S&P 500 has seen modest gains, averaging around 2% from May to October, compared to more robust gains of 7% from November to April, according to Fidelity Investments.

Some sectors, like consumer discretionary, industrials, materials, and technology, have historically performed well from November through April, while defensive sectors have typically flexed their muscles from May to October.

Rather than taking the saying literally, some investors opt for a more nuanced approach. They may rotate from riskier sectors to those historically resilient during market downturns. For example, a strategy that includes a mix of healthcare and consumer staples stocks from May to October and then shifting to more economically sensitive sectors from November to April has proven fruitful between 1990 and 2021.

In essence, while the idea of ‘selling in May and going away’ has its supporters, historical data suggests there may be more successful strategies out there. Additionally, relying solely on calendar-based trends overlooks the dynamic nature of markets, including changing economic conditions and individual investor goals. Rather than blindly following tradition, traders should consider a broader range of factors that affect prices and trends when making investment decisions.