The “sell in May, and go away” strategy isn’t getting much love on Wall Street this year.
Market pros acknowledge that history clearly shows the market’s strongest six-month period is November to April, but they also say that’s not necessarily a factor that should shape investors’ plans in any year.
“Any investment strategy that you can summarize in a rhyme is probably a bad strategy,” said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. Golub raised his S&P 500 target on Friday to 4,600 for year end from 4,300, based on strong earnings.
He said on average the market’s performance does follow the pattern of weakness between May and October, but it’s not a reason to get out of stocks.
“This would be perfectly reasonable if every single May looked the same as the May the year before,” Golub said. Just comparing this year to last year shows a huge contrast.
“Last May of last year the market was jumping off the bottom.” He said now the backdrop has totally changed, from a country and economy gripped by the pandemic last year, to a period in which a booming economy and earnings should drive further gains.
“Look at what we’re having this earnings season. U.S. companies are beating estimates by 22%. 22% is unheard of. The economic data is phenomenal,” said Golub.
The second quarter is expected to be even stronger, and those earnings reports will be released in July.
“I’m not selling in May, and I wouldn’t advise somebody else to,” said Golub. “I think the biggest mistake you can make in a market like this is to get too cute and get out too early. You’re better off trying to stay a little longer than get out too early.”
Carter Worth, chief market technician at Cornerstone Macro, agrees that generally investors would not be well served to get out of the market in May and stay out through October.
But this year he expects the market to enter a weak period. Worth said aside from the seasonal factors, he expects the market has been topping.
“It’s a time to reduce exposure. Intermediate tops can last for three to five months,” he said.
Worth studied the seasonal trend and found that the 27.8% performance of the Dow from Nov. 1 through April 30 was the fourth strongest for that six-month period going back to 1896.
“After especially good November to April six-month runs, the ensuing six months is lackluster,” Worth said. He added that this could be the case for any six-month period following a strong gain for stocks.
The average gain for the Dow in the top 10 years for the November-to-April period was 27.5%, compared with an average 2.9% in the ensuing May-to-October periods. The average overall gain for the full year in the 10 best years for November to April was 23.7%.
For all years going back to 1896, the Dow’s average return was 5.2% in November to April, and 2.1% in May through October. The average performance for all years was 7.3%.
Even though Worth expects the market has found a near-term top, he said the seasonal investment strategy is the wrong approach.
“The six-month period of November to April has offered higher returns than the six-month period of May to October, 1896 to 2020,” he said. “But the best strategy by far, as all will know, is to keep capital exposed to the market year in and year out.”
Worth calculated that $1 million invested in the market in November-through-April periods going back to 1896 by investors who then went to cash from May to October would have returned $164.4 million.
Investors who stayed in all year would have a return of $672.6 million on that original $1 million.
A tendency for a summer rally
The pattern of seasonal weakness from May to October is also clear in the S&P 500, but the average return has been positive 66% of the time going back to 1928, according to Stephen Suttmeier, technical research strategist at Bank of America.
He said because the index had an average positive return of 2.2% for that six-month period, the “sell in May” strategy “leaves much to be desired.”
Suttmeier said his study confirms a tendency for a summer rally, and the decline in the May to October period is “back-end loaded.”
“Instead of ‘sell in May and go away’ it should be ‘buy in May and sell July/August,’” he wrote in a note. “Monthly seasonality suggests selling in the strong month of April, buying weakness in the risk-off month of May and selling in July to August, ahead of September, which is the weakest month of the year.”
The summer rally can be even stronger in the first year of a new president’s term, with the market strong in April and July, but also with a solid return in May, Suttmeier noted.
“This spring to summer rally and fall correction is magnified in Presidential Cycle Year 1 with April-June up 5.5% on average and August-October down 2.4% on average,” he wrote.