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EMBARRASSED BY YOUR impulse to try the “sell in May and go away” gambit? Don’t be. You’re in good company. Selling stocks in the spring and returning in autumn was a favorite pastime of London financiers and bankers, who abandoned the steamy city for cooler vacation destinations. They resumed stock trading around St. Leger’s, the day of the last leg of English horse racing’s Triple Crown.
The tendency of global stock markets to rise less in the six months from May to October, compared to the year’s other six months, gained traction in the U.S. after articles about this seasonal anomaly appeared in The Wall Street Journal and the Stock Trader’s Almanac in the mid-1980s. In the ensuing years, the reliability and usefulness of the strategy have been subjected to much scrutiny.
Stock market gains from May through October have averaged some 2%, compared with 8% from November through April. From 1970 to 1998, the spring-summer span underperformed the fall-winter span in 36 of 37 developed and emerging markets. What about the U.S.? Since 1945, the S&P 500 has finished with a gain 77% of the time during the November-to-April period and 67% in the remaining half-year.
But the difference between the more and less desirable six months may be narrowing. In the 10 years ending in 2020, the Memorial Day to Labor Day stretch added almost 4% to annual results. The growth of the internet has been cited as a reason the summer doldrums may disappear. A whole new wave of folks can now invest while sipping a margarita on the veranda of their summer beach house. Alternatively, the improvement from 2% to 4% during the weaker six months could just be a function of the market’s bullish cast over the past decade.
Early on, some market observers recommended switching to cash or Treasury bills for the late spring and summer. But Treasurys and money market funds have struggled to notch a 2% annual gain in recent years. Even now, yields on those cash investments only equal the 4% achieved by the market during the seasonally weaker May-October period—and, of course, we’re talking about a 4% annual yield, which would only be worth 2% over six months. To be sure, T-bills are safer than stocks, but short-term volatility is—or should be—pretty irrelevant to long-term investors.
So far, we’ve seen little reason for the long-term index fund holder to bail out for the dog days of summer. But I did come across an intriguing switching strategy proposed by investment strategist Sam Stovall, often acknowledged as the dean of sector investing. Citing evidence that defensive sectors perform better in the May-October time frame, he suggests rotating into health care in the spring and then back into the broad market in the fall.
I checked how the strategy would have worked during 2021’s 29% market gain and 2022’s 18% loss. In 2021, from around Memorial Day to Labor Day, prices of Vanguard S&P 500 ETF (symbol: VOO) increased 11%, while Vanguard Health Care ETF (VHT) rose 9%, meaning the Stovall strategy fell short. But it was a different story last year. In 2022’s spring-summer stretch, Vanguard’s S&P 500 ETF fell 6%, while the Health Care ETF advanced more than 2%. That means that, for the two years combined, Vanguard S&P 500 gained about 5%, while Vanguard Health Care picked up 11%.
Still, two years is a woefully insufficient sample and, indeed, the bump in health stocks could be just a random blip. Moreover, folks trading in taxable accounts should keep in mind that any gains could be taxed at short-term capital gains rates. The bottom line: For all but the most intrepid, I see no reason to ditch your broad market index funds when you decamp for your summer mansion.
Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.
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The one I could never figure out is the “buy the close, sell the open” strategy where one only holds overnight and apparently the gains are much better overall if only holding overnight. I would never try that (buy and hold for me) but apparently it has worked for much longer than anyone thought it should.
Yeah, Nate, one of those anomalies. There is at least one ETF dedicated to capturing the overnight effect.
It seems that, with the rise of AI, computer modeling, and other increasingly sophisticated trading technologies, that many of these anomalies such as the “sell in May and go away” type are becoming more blurred, and harder to sustain and recognize, much less utilize for any kind of consistent, repeatable results. And that’s the key, isn’t it? Viewed in that light,”sell in May and go away” (and other market anomalies) start to feel a lot more like casino gambling, and less like an investment strategy. Entertaining for sure, but not really very useful :).
I think you are largely right—that’s where the efficient market hypothesis comes into play. The “sell in May” phenomenon has been one of the most enduring, but maybe technological advances will finally overcome that little tidbit of human nature that just keeps the anomalies alive. Of course, time and, as you say, sophistication may be enough to smooth out the seasonal bumps.
Remain unconvinced that a buy and hold index fund investor (e.g. me) needs to pay any attention to such esoterica. Would be even more the case if you had to account for trading fees and taxes.
Hi mytime
You’re right, you don’t! And you won’t have to do the research and perform those tricky transactions. This is really for folks who are a little more hands on and interested in possibly squeezing out a few more dollars by slightly tweaking their core index investments. Remember, if you’re in mutual funds there’s no bid/ask spread, usually no exchange fee and no commission. If you’re in ETFs, there also would be no trade commission but you would have to absorb the spread. Yes, you might incur some nasty tax hits in a taxable account, but not in a tax-advantaged one. But yes, all the “erotica” is a potential enhancement but certainly not necessary. Sounds like you are doing fine and very comfortable with your tried and true index fund plan.
Was that a Freudian slip, Steve? I wrote “esoterica”, but I gather some people do get a charge out of digging into data I find boring.
Ha ha! Look, at 78, maybe it’s a Freudian wish!