"Sell in May and go away" — the old equity-market adage still holds water, but, as Bloomberg's Mark Cudmore explains, it's important to note how the seasonals have evolved since the great financial crisis.
In its original usage, the motto implied it’s advisable to cash out of equities at the end of May and enjoy a long summer of relaxation before returning to invest again. It wasn’t just a flippant saying; the facts tallied with the intuition.
For the 20 years until 2009, the Standard & Poor’s 500 Index lost an average of 1.47% from the start of June through September, according to data compiled by Bloomberg. Further, as BofAML's Stephen Suttmeier shows, seasonal data on the S&P 500 back to 1928 show that May through October is the weakest 6-month period of the year, while November through April is the strongest 6-month period of the year. May-October is up 63.6% of the time with average and median returns of 1.96% and 3.18%, respectively.
The explanation was that the summer holidays meant lower participation and hence greater volatility relative to returns. So the market stayed away to avoid stress and, as a result, the negative prophecy became self-fulfilling.
But something has changed since the global financial crisis. Whether it’s global warming, the impact of algorithmic trading, or just nervous investors trying to be proactive, the four-month “summer” slump has shifted forward.
Somehow, in the six years through 2015, May has gone from being the best month for the S&P 500 to the second-worst. Even in the midst of the historic bull market, the May to August period has seen average losses of 3.04%.
Furthermore, as BofAML's Stephen Suttmeier notes, the S&P 500 return of -0.68% for November 2015-April 2016 is well below average. When November-April is below average during secular bull market years, May-October is weaker with the S&P 500 up only 50.0% of the time with an average return of 1.18% (median of 1.71%)
So “Sell in May” now seems to mean the start of May rather than the end of the month. And there are solid reasons to heed the warning this year: the Fed’s data-dependency will raise volatility around U.S. economic reports, while the closer we get to June, the more uncertainties will build surrounding 2016’s big risk event: the "Brexit" referendum. So if you can start your vacation early, now may be the time.
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