Investment snapshot: Sell in May and go away

investment snapshot
John P. Maguire of Rationalis Capital Management in Hinsdale | Submitted

We’ve started a new investment feature designed to give you some background on current market trends. Our second piece takes on a famous saying in the investment world:

“April showers bring May flowers.”

Starting when we were very young, we have all heard this rhyme at various points in our lives.  But how many of us are familiar with the investment adage to “sell in May and go away”?

This saying originated in England and the most credible version was, “Sell in May and go away, do not return until St. Leger’s Day.” Established in 1776, St. Leger’s Day falls on the second Saturday in September and is famous to English horse racing fans as the final leg of Britain’s five Classics.  

Not unlike today throughout the world, historically many investors would take frequent and long vacations during the summer months in England. That led to decreased activity and lethargy in the stock markets.

Over the years, the dog days of summer have brought Wall Street its worst performing months of the year. Since 1950, September has been the worst of the worst, with a cumulative return of -0.64 percent (including 35 months with negative returns and 29 months that have been positive).  By contrast, according to the Stock Trader’s Almanac, the six-month span from November to April has produced the best returns, averaging approximately 7.5 percent since 1950.

But keep in mind, these are all broad brush strokes and there are risks with this strategy of selling in May.

First, although this timeframe often underperforms the November-April period, it has still averaged a positive (albeit modest) return of 0.3 percent since 1950. The loss would have been especially acute in May 2013, when an investor would have missed a 5.37 percent return by selling just before the first of May and going away.

Second, there are costs to selling, perhaps most notably commissions as well as capital gains taxes. These costs should not be underestimated since there will be commission costs in getting back into the market later in the year.

And finally, it has been repeatedly proven that, despite their statistical underpinnings, market timing and seasonality strategies do not always pan out.

Another factor to weigh is that over the last five years the S&P 500 is up by more than 110 percent (that’s no typo), we are talking about more than doubling. So where does this leave us when contemplating the “sell in May and go away” saying?

Most professional investors are looking for a correction in the major equity markets and yet they are also fearful of underperforming their peers. Some are using this period to slightly reduce their equity exposure and creating a more defensive asset allocation with the intention of re-investing in equities during a sell-off that may occur in the more volatile August-October period.

This time of year, then, investors may be well advised to trim equity positions and lower risk while waiting for better valuations in the stock markets. 

DISCLAIMER: The information contained in this article is not a solicitation to sell securities or investment advisory services where such an offer would not be legal. Information included in this statement regarding market or other financial information is obtained from sources believed to be reliable. Past performance is never a guarantee of future performance.

John Maguire has been an Investment Advisor for more than 30 years. He is a Managing Partner of Hinsdale-based Rationalis Capital Management, LLC, online at www.rationaliscapital.com. He can be reached at john@rationaliscapital.com.

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