What Is "Sell in May and Go Away"?
"Sell in May and go away" is a well known saying in finance. It is based on stocks' historical underperformance during the six-month period from May to October.
The historical pattern was popularized by the Stock Trader's Almanac, which found investing in stocks as represented by the Dow Jones Industrial Average from November to April and switching into fixed income the other six months would have "produced reliable returns with reduced risk since 1950."
The divergence has remained pronounced in recent years, with the S&P 500 index gaining an average of about 2% from May to October since 1990, compared with an average of approximately 7% from November to April, according to Fidelity Investments.
An academic paper that surveyed stock markets outside U.S. found the same pattern, calling the seasonal divergence trend "remarkably robust."
- "Sell in May and go away" is an adage referring to the historically weaker performance of stocks from May to October compared with the other half of the year.
- Since 1990, the S&P 500 has averaged a return of about 2% annually from May to October, versus about 7% from November to April.
- The pattern did not hold in 2020, and is likely to be outweighed by more pressing considerations in other years.
- Investors could try to capitalize on the pattern by rotating into less economically sensitive stocks from May to October, based on historical data.
Theories for the Seasonal Divergence
Financial markets were once influenced by the seasonal patterns tied to agriculture, but these have likely faded to insignificance given farming's dramatically reduced economic weight.
Seasonality in investment flows may persist as a result of year-end financial industry and business bonuses, with the mid-April U.S. income tax filing deadline possibly contributing.
Whatever fundamental considerations may be in play, the historical pattern is more pronounced as a result of the October stock-market collapses in 1987 and 2008.
The last significant stock-market decline during the period from May to October took place in 2011, with the S&P 500 down 8.1%. the S&P 500 declined 0.3% over the same months in 2015.
Why Not Sell in May and Go Away?
The only drawback of historical patterns is that they don't reliably predict the future. That's especially true of well known historical patterns. If enough people were to become convinced the 'Sell in May and Go Away" pattern is here to stay it would, in fact, promptly start to go away. Early-bird sellers would all try to sell in April, and bid against each other to buy the stocks back ahead of the pack in October.
The seasonal tendency's averages also conceal big fluctuations from year to year, of course. In any given year, the influence of seasonality is swamped by a variety of other, often more pressing considerations. Selling in May would have done anyone following that adage no good in 2020 as the S&P 500 slumped 34% over five weeks in February and March as the COVID-19 pandemic struck, only to return 12.4% from May to October.
In fact, in the decade through 2020 the unfashionable summer half of the market year averaged a solid if unspectacular return of 3.8%, with no significant decline since 2011, according to LPL Research.
|S&P 500 "Sell in May" Returns (May-October)|
|Year||S&P 500 "Sell in May" Return|
"Sell in May" has also been off the mark in early 2022, with the S&P 500 down 8.8% in April and 13.3% since the start of the year.
In summary, while the historical pattern is undeniable, its predictive power is questionable and the opportunity costs incurred potentially significant.
Alternatives to 'Sell in May and Go Away'
Instead of acting on the saying literally, investors who believe the pattern will continue could rotate from the higher-risk market sectors to those that tend to outperform in periods of market weakness.
For example, a custom index representing the strategy of rotating between healthcare and consumer staples stocks held from May to October and more economically sensitive market sectors from November to April would have significantly outperformed the S&P 500 in both periods between 1990 and 2021, according to Pacer ETFs, sponsor of an exchange-traded fund attempting to execute this seasonal rotation as an investment strategy. The Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF (SZNE) had about $80 million in assets and was down more than 12% in 2022 as of April 29.
For many retail investors with long-term goals, a buy-and-hold strategy—hanging on to equities year-round, year after year, unless there's a change in fundamentals—remains the best course.
Stock Trader's Almanac. "Our Strategy."
Fidelity Investments. "Should You 'Sell in May?'"
Jacobsen, Ben and Zhang, Cherry Yi. “The Halloween Indicator, 'Sell in May and Go Away': Everywhere and All the Time,” 2018, pp. 1-10.
LPL Financial. "Time to Sell in May?"
Pacer ETFs. "CFRA Institutional Presentation," Page 1.
Pacer ETFs. "Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF."
Morningstar. "Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF Performance."