Sell in May

It is the end of April, which traditionally means growing unease in part of the investor community about what’s called the ‘Sell in May effect’. For the uninitiated, Sell in May refers to a seasonal pattern that has been present in stock markets, but also other parts of the financial markets. The official definition of this seasonal factor is that you’re not fully compensated for the risks you take by investing in stocks during the summer months, indicating that stocks tend to generate lower returns and experience higher volatility in some months than in others. Although there is great clarity on when to sell (May), the best time to re-enter the market is much less clear. Some think it’s around Halloween (which is why it’s also sometimes referred to as the ‘Halloween effect’), others say St. Leger’ Day, and some simply say October or November. The chart above takes the end of September as the point of re-entry.

What this clearly shows is the shocking difference between the returns of the two periods. The orange line gives the price return of the S&P 500 over the entire period, which has yielded a 7.5% annualized return over the past 25 years (not including dividends). If you had invested only during the positive months (October through April), you would have achieved the results shown by the black line: a total annualized return of 7.7%. If, on the other hand, you had opted to invest only during the ‘summer’ months, your return would have been that presented by the turquoise line: a small net loss of 0.2%. The message is clear: why stay in the volatile stock markets during those summer months at all?


Much like with technical analyses and approaches based predictable cycles such as Elliot or Kondratiev waves, the investment world is divided on the credibility of Sell in May. You’re either a believer or you’re not: there seems to be no middle ground.

The believers have one very strong argument in their favor: the track record. The chart above shows that this strategy of only being in the market in the autumn/winter months clearly works. Yet there are undoubtedly always years in which this strategy does not work. In 2016 the balance tipped only slightly in favor of the summer months (5.0% versus 4.3%), while the difference in 2009 was much more pronounced (21.1% in summer versus 1.9% in winter) as stocks reached the financial-crisis low in March of that year. And adopting this strategy in the 1930s would have had some pretty horrific consequences. As a rule of thumb, however, Sell in May works in every two out of three years, which is quite a convincing average in financial markets.

Selling in May and returning in October led to huge losses in the 1930s


Source: Bloomberg & Robeco

What the believers lack, however, is a compelling story about why this phenomenon occurs. Plenty of possible explanations have been put forward: low liquidity due to holidays, bonuses at the beginning of the year, the number of daylight hours, optimism at the end of each year that ‘next year will be better’ (the so-called ‘optimism cycle’) are to name but a few. None of these reasons seem to survive the scrutiny of tests, however. More importantly, if there is indeed a Sell in May effect, why should it persist? If everyone were indeed to start offloading equities in May, surely stocks would collapse and thus create very good buying – and market re-entry – opportunities in June? If anything, the phenomenon appears to have become more stable over time, not less so… How is that possible?

May returns have not become increasingly negative over time


Source: Bloomberg & Robeco

This may come as a bit of a surprise, but it is clear that there is only one reason why it persists: the non-believers! As long as the non-believers think they should be in the market throughout the year or, better still, as long as they continue to make fun of the believers, they will continue to support the conviction of believers that they should keep harvesting this anomaly! So, if you are a true non-believer and hate this annual Sell in May talk, there’s only one real way to stop it once and for all: join the selling! Selling in May will make it go away.

And no, this is not serious investment advice. 😊

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