Read this before you ‘sell in May and go away’

Tis the season for the “sell in May and go away” commentaries. An algorithm served one up to me this morning as the first article of the day that I should read. I didn’t even see it coming. I don’t know if that’s because May snuck up on me this year or because the US equity market, as represented by the S&P 500 Index, has done just fine between May and October in 11 of the past 12 years, including a 13% gain last year. (1)

This old adage is supposed to remind us to sell our stock holdings each spring to avoid a seasonal decline in equity markets. The idea is to sell in May and get back in the markets in November. Why? It’s not entirely clear, although lower trading volumes as Wall Street participants flee to the beaches has often been posited as an explanation. The only problem with “sell in May and go away” is that it doesn’t work more often that it does, and over a long-term period it would have cost investors dearly.

‘Sell in May’ ignores the impact of market rallies

The argument goes that over the past nine+ decades (1928 to 2020 to be precise), the returns on the broad US equity market (as represented by the S&P 500 Index) from May to October have been worse, on average, than in any other six-month period. (2) Adhering to the adage would have prevented investors from participating in such infamous events as the Wall Street Crash of 1929, Black Monday in 1987, and more recently the 2008 post-Lehman crash and summer 2011 correction.

However, the analysis often ends there with little thought of the big summer rallies in the early 1980s, the 20% May to October market advance in 2009, 2013’s 11% summer rally, the 9% May to October market advance in 2017, or last year’s rally. The reality is that markets have posted positive returns over 70% of the May to October periods between 1928 and 2020. (3)

Could inflation lead to a summer swoon?

Admittedly, this year’s edition (at least the one I read) went further than the usual seasonality argument. The article posited that a mid-summer rise in inflation would result in tighter financial conditions and market volatility as the market priced in the higher probability of Federal Reserve policy tightening. That’s a plausible argument. Market corrections, after all, are almost always the result of policy uncertainty. However, a summer swoon is certainly not a foregone conclusion. A more optimistic view would have investors welcoming the acceleration in US economic activity from a previously depressed state and viewing marked improvements in corporate earnings and pricing power of businesses as being optimistic for equities.

It’s certainly an interesting debate, but one that I believe will likely matter little for long-term investors. If 2020 taught us anything, it was timing the market is a fool’s errand.

Conclusion: The numbers show that ‘Sell in May’ doesn’t work

Getting back to our larger point, does sell in May and go away work as a long-term investment strategy? In short, no. A $1,000 investment held in the broad US stock market (as represented by the DJIA)

from January 1928 to December 2020 would now be worth $5.9 million.4 But if that same investor traded in their stocks for Treasury bills on May 1 of each year, only to get back into the market on Nov. 1 of each year, their investment would be worth $1.8 million, or over $4 million less! (4)

For long-term investors, the adage to sell in May may not be the best advice.

Important information

Header image: Marcel / Stocksy

Past performance does not guarantee future results.

An investment cannot be made into an index.

All investing involves risk, including risk of loss.

The opinions expressed are those of the author, are based on current market conditions as of April 30, 2021, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward-looking statements, understand they are not guarantees of future results. They involve risks, uncertainties, and assumptions. There can be no assurance that actual results will not differ materially from expectations.

1. Source: Bloomberg L.P. as of Dec. 31, 2020
2. Source: Yale University, Shiller database as of Dec. 31, 2020
3. Source: Bloomberg L.P. as of Dec. 31, 2020. As represented by the S&P 500 Index.
4. Source: Factset, as of Dec. 31, 2020. As represented by the Dow Jones Industrial Average.