This May, Tell Seasonal Myths to Go Away

What next? Stocks have spent most of this year in a correction, with the S&P 500 testing a new low on April’s final trading day. Now it is May, kicking off what many argue is a seasonally weak stretch of the year. The Sell in May and Go Away chorus isn’t as loud as usual this year, in part because some argue the correction is upsetting the normal pattern. In our view, that is a rather strange twist on seasonality that isn’t any more valid than the normal version. We are bullish, but this isn’t why—and whatever your expectations for stocks, we don’t think seasonality should be a factor. It just isn’t real.

For the (blessedly) uninitiated, Sell in May and Go Away stems from old beliefs about how markets work in the summer. In olden days, before computers and cell phones and the internet, liquidity would typically drop when brokers took their summer holidays. They would usually come back around the St. Leger Stakes—a mid-September British horserace—hence the original maxim: Sell and May and go away, and come back at St. Leger Day. These days, brokers have connectivity and backups, and liquidity tends to be flush during the summer, so it has morphed into a statement about seasonal stock returns. The six-month stretch from April 30 through Halloween, on average, is weaker than its opposite six months, so the popular iteration of that seasonal saw would now have people sit on the sidelines from now until October ends.

But the data supporting this proverb fall flat. It rests on one—just one—data point: The six-month stretch ending on Halloween is the S&P 500’s weakest half-year span. Meaning, the average 4.5% total return in these six months since 1925 is the lowest of all.^[i] Now, eagle-eyed readers may have noticed there was no negative sign: That average return is still positive. It just isn’t as snazzy as the average 7.2% return between Halloween and April 30, which happens to be the best six-month span.^[ii] Call us crazy, but sitting out 4.5% average returns year in, year out seems like a lot of compound growth to leave on the table.

There isn’t a materially higher likelihood of negative returns during this stretch, either. Only 26 of the 97 full April 30 – October 31 stretches since good data begin were negative. From Halloween through April 30, there were merely two fewer negative instances—24. As Exhibit 1 shows, the frequency of positivity doesn’t vary much across all 12 six-month iterations.

Exhibit 1: Seasonality Falls Apart

Source: Global Financial Data, Inc., as of 5/3/2022. S&P 500 Total Return Index trailing 6-month returns, July 1925 – April 2022.

Past performance isn’t predictive, but nothing here implies the next six months are likely to be bad. Historically, returns were positive much more often than not. So the question for investors is, how likely are these next six months to be one of those minority negative instances? This question is always a matter of opinion, not provable science, but we see many reasons to think the answer is, not very likely. We still think the S&P 500’s setback is a sentiment-fueled correction (typically a -10% to -20% drop), not a bear market (usually longer and deeper than -20% with a fundamental cause). Corrections usually feature widely discussed scare stories—this time, we have inflation (see our views here), energy prices (here), the war in Ukraine (here) and China’s latest lockdowns (here). If markets are at all efficient, and we think they are, then these stories likely don’t have much material surprise power, barring some material escalation above and beyond today’s dreary expectations. Moreover, all of these—together with midterm elections—present opportunities for uncertainty to fall.

Stocks don’t like high uncertainty, but they love high-and-falling uncertainty. We should get a good dose of that as more data confirm how the global economy is weathering all of today’s alleged headwinds. Then November’s midterms will reduce political uncertainty in the US, adding to the global clarity emerging from local and national elections in France, Australia, Korea, the Philippines and the UK. We see very, very few (if any) people preaching the benefits of political clarity, never mind the gridlock these contests have already brought and are likely to bring—a bullish sign that there is plenty of positive surprise power.

Seasonality is fun trivia, we guess, if you are into that sort of thing. But it has no sway over stock returns, and we don’t think it is a good basis for an investment strategy. Fundamental forces, not widely known calendars, move stocks.