Explanation, Data, and Limitations of the “Sell in May and Go Away” Strategy

What Is “Sell in May and Go Away”?

“Sell in May and go away” is a popular adage in finance that stems from the historical trend of stocks showing weaker performance from May to October compared to the rest of the year. This pattern was brought to light by the Stock Trader’s Almanac, which recommended shifting investments from stocks to fixed income during these six months since 1950. This strategy aimed to provide more consistent returns with reduced risk.

Recent data supports this seasonal divergence, with the S&P 500 index historically gaining around 7% from November to April, contrasted with only about 2% from May to October since 1990, as noted by Fidelity Investments.

Even markets outside the U.S. exhibit this trend, as evidenced by academic research identifying this pattern as “remarkably robust.”

Key Takeaways

• “Sell in May and go away” pertains to the historical stock market underperformance from May to October.
• The S&P 500 has shown an average return of about 2% annually from May to October since 1990, in contrast to around 7% from November to April.
• While the pattern didn’t hold in 2020, it remains a consideration for investors looking to optimize their portfolios based on historical trends.
• Rotating into less economically sensitive stocks during the weaker months may align with this seasonal pattern.

Theories for the Seasonal Divergence

Seasonal trading patterns may have originated from agricultural influences in financial markets, although modern economic practices have likely diminished this connection.

Seasonality in investment flows could persist due to year-end bonuses in the finance industry, coupled with tax considerations like the U.S. income tax filing deadline in mid-April.

Additionally, significant stock market downturns in October, such as those in 1987 and 2008, have reinforced the prominence of this seasonal trend in trading.

The most recent substantial decline during the May to October period occurred in 2011, showcasing an 8.1% drop in the S&P 500. In contrast, the market remained relatively stable during the same months in 2015.

Why Not Sell in May and Go Away?

Despite the historical validity of seasonal patterns, their predictive power can be unreliable, especially when widely known. Overreliance on these patterns can trigger market reactions that might counteract the expected outcomes.

Yearly fluctuations and unforeseen events often overshadow the influence of seasonal trends. For example, the massive market volatility in 2020 due to the COVID-19 pandemic disrupted the expected performance, with the S&P 500 rebounding strongly after a significant slump from February to March.

Despite the historical trend, the market has shown solid returns averaging 3.8% from May to October over the past decade, with no major declines since 2011, according to LPL Research.

S&P 500 “Sell in May” Returns (May-October)
Year S&P 500 “Sell in May” Return
2011 -8.1%
2012 +1.0%
2013 +10.0%
2014 +7.1%
2015 -0.3%
2016 +2.9%
2017 +8.0%
2018 +2.4%
2019 +3.1%
2020 +12.3%
Source: LPL Research

Recent market trends, like the downturn in early 2022, further highlight the unpredictability of seasonal strategies, with the S&P 500 showing notable declines.

While acknowledging the historical significance of seasonal patterns, investors should approach them with caution due to their limited predictive value and potential opportunity costs.

Alternatives to ‘Sell in May and Go Away’

Instead of strictly adhering to the adage, investors could explore rotating between market sectors to adapt to potential market weaknesses. Shifting from high-risk sectors to those that historically perform better during market downturns could enhance portfolio performance.

An investment strategy involving sector rotation has shown significant outperformance compared to the S&P 500 between 1990 and 2021. For retail investors with long-term goals, maintaining a buy-and-hold strategy might be the most effective approach, holding onto equities throughout the year unless fundamental changes warrant adjustments.