“Sell in May and go away” is one of Wall Street’s oldest clichés. The basis of this statement is that the market tends to go in a sideways pattern or even decline before resuming its upward path sometime in October. In fact, August and September have the poorest record for performance of any month in the calendar. So the theory extolls selling your portfolio, gather the family and head to the beach until the early fall when it’s time to get back in. Indeed, the November to April period has been the better performer of the two stretching back to 1950.
There are two problems with this strategy. One is most investors would necessarily realize capital gains as they liquidate their portfolios, thereby creating a cash expense the following April (paying taxes is one of the two sure things in life…we’ll not mention the other). The other is the performance of the May-October period during long-term (or secular) bull markets is actually quite respectable. Ned Davis Research has compiled the returns divided between the spring /summer and fall/winter periods, as follows (1950 through 2014):
All Years May-October November-April
Mean % gain 1.4% 7.1%
Median % gain 2.1% 6.6%
% of time positive 63.1% 78.5%
Secular Bull Markets
Mean % gain 3.1% 9.9%
Median % gain 4.2% 10.0%
% of time positive 67.5% 85.0%
Secular Bear Markets *
Mean % gain -1.4% 2.6%
Median % gain 1.2% 3.9%
% of time positive 56.0% 68.0%
*1966-1982 and 2000-2008
The “sell in May” cliché is really just a market timing strategy. As shown above, performance is pretty good during a secular bull market (as we are now experiencing), so an investor blindly following the cliché is doing so at their own risk.
This commentary is provided for general information only and nothing contained in the material constitutes a recommendation for the purchase or sale of any security. Although the statements of fact in this report are obtained from sources that Woodley Farra Manion Portfolio Management consider reliable, we do not guarantee their accuracy and any such information may be incomplete or condensed.