May Is Just a Month, Not a Risk

We are a week away from the month of May, but apparently it is never too early for the seasonal adage known as “Sell in May and Go Away” to hit headlines. It has started percolating over the last couple of weeks, perhaps because financial news has been rather quiet since last month’s banking tumult died down. For us, debunking the Sell in May myth has become an annual rite, and rest assured, we will take it down once again here. But more broadly, we think the arguments the topic has inspired thus far provide an interesting sentiment snapshot.

For those of you who have managed to go through life without encountering Sell in May, one, we are envious and two, here is a brief synopsis: As the name suggests, it preaches getting out of stocks in late spring and staying out for a while. Traditionally, it referred only to the summer, on the theory that volatility was higher and liquidity and returns were lower while brokers were on holiday. Hence, sitting out of stocks between May and Britain’s St. Leger Stakes horse race in September would maximize the likelihood of avoiding summer vacation weirdness. But as finance became less upper-crust British and more data-heavy, it morphed into sitting out between April 30 and Halloween since that six month-stretch is the calendar’s weakest rolling six-month span. That is more or less the modern definition, although the original still flares up now and then.^[i]

Sell in May, like most seasonal adages, works just often enough to stay in the zeitgeist—and nowhere near often enough to guide investment decisions. In the 97 completed April 30 – Halloween Sell in May windows since good S&P 500 data start in 1925, returns in that six-month stretch were negative 27 times.^[ii] That equates to 27.8%, a little less than one-third of the time. If we were talking baseball batting averages, this would be decent enough to stay in the lineup. But for investing, a 27.8% success rate is dismal. It also makes selling in May defy basic logic, considering this stat means returns are positive 72.2% of the time. We have a hard time seeing good sense in automatically sitting out a stretch that—like stocks overall—is positive much more often than not. Those “weak” average returns are still positive, too—missing positive returns is not a good way to reap the magic of compound growth.

To the investing world’s credit, we aren’t aware of any professional who actually preaches and practices rigid Selling in May and Going Away. It seems to be more of a lede to open a broader discussion of all the alleged fundamental and technical reasons to sell in the spring. We have seen a fair amount of that so far this year, which isn’t a shock. The rally since last October 12 looks more and more like a new bull market with each passing day, and what Fisher Investments founder and Executive Chairman Ken Fisher calls the “pessimism of disbelief” is a hallmark of young expansions. That is, people remain stuck in bearishness, perceive the rally as fools’ gold and seek reasons to justify their stance.

This year, we have seen people cite high valuations, continued rate hikes, tighter liquidity after the collapse of Silicon Valley Bank and Signature Bank, tapped-out consumers and more. Some have suggested selling early to get out before everyone else does, lest their selling knocks stock prices and forces you to swallow a lower exit point. These are all the same fears that have dogged stocks for months—and in rate hikes’ case, since last year—just wearing a shiny new Sell in May wrapper. You can find our take on each of them here, here, here and here—in this context, we think their prevalence is simply an encouraging sign of sentiment.

To be fair, we have also seen some analysts saying Selling in May risks missing a continued rally, so pessimism isn’t universal. And we must also point out that Sell in May worked last year. Had you sold April 30 and come back at market close on Halloween, you would have skipped an -8.1% MSCI World Index decline during that spell, re-entered 19 days after stocks bottomed and earned an 11.7% return from that day through Friday’s close.^[iii] Perhaps it “works” again this year and there is a summertime swoon. But successful investing is a probabilities business, not a “perhaps” business. Moreover, short-term returns are unpredictable, full stop.

Hence, we encourage investors to position their portfolios with the next 12 – 18 or more months in mind, not the next 3 or 6. That is a more reasonable timeframe to measure probabilities, as it allows enough time for the shorter-term wiggles to even out into a trend. If the highest likelihood is that the trend over this foreseeable future is a bull market, then we think it makes most sense to stay in stocks. That will mean participating in some short-term downside, whether during the Sell in May window or some other time, but it will likely also mean capturing the full bull market returns that occur cumulatively—returns that can then compound over the rest of this bull market and your entire time horizon.