Sell in May and Go Away

The last 15 months in global markets can best be described as highly volatile, and a period unlike most in history.

2022 brought about extreme losses for both equity and bond markets resulting in an uncanny correlation between two asset classes, that are mostly uncorrelated. The first quarter of 2023 has seen positive sentiment return to general equity markets, albeit confined to certain sectors.

So this raises the question – Is there any certainty when it comes to financial markets?  The obvious answer would be unequivocally NO, but old adages would sometimes have us believe otherwise.  One such adage is ‘Sell in May and go away’, but does this have any influence on how markets perform on a seasonal basis or is this an archaic saying that needs to be resigned to the annuls of history?

The adage speaks to the investment strategy that selling in May eliminates an investor’s potential participation in a period known for historical underperformance. The period in question often runs between May and October, while in contrast, November to April tends to outperform, but where did this adage/strategy originate…

The original phrase was ‘Sell in May and go away, come back on St. Ledgers day’. St Ledgers day refers to the final race of UK Horse Racing’s British Triple Crown which is evident that the phrase originated in Britain. In its original context it recommended that investors vacate London to enjoy the summer months and escape the London heat. The US adopted the adage, but more so to align with the US harvesting season as most farmers planted around April-May with harvesting taking place in September -November.

The big questions remains:

  1. Does it hold firm as an investment strategy?
  2. And given its origins, does it still exhibit the type of performance it expected when it was termed all those years ago?

Between 1990 and 2022, the strategy offered up some interesting average returns:

  • The return averages of the periods in question, the S&P500 during May to October would have returned on average 2% annually whereas the S&P500 returned closer to 7%, on average, during the months of November to April, so at face value it does seem like the strategy works.
  • Since 1945, the periods between May and September have resulted in positive returns 66% of the time whilst the period of November to April sees this figure rise to 77% , the picture starts to look more certain.

However, these averages do not take into account the size and volatility of those returns, on an annual basis, which is where the strategy experiences some pitfalls. Between 2011 and 2020, there were 2 negative performing periods for the strategy with the worst drawdown being -8.1%, in 2011.  Whereas the best performance returned 12.3% in 2020 ,albeit off a low base as February 2020 to March 2020 resulted in a decline of 34% for the S&P500. So technically, the strategy would have seen an investor lock in huge losses early in the 2020 year, and miss any recovery should they have sold in May.


But are there any other external common factors that exacerbate the return profile?  Well, many do believe that some seasonal factors may be at play for the November to April period and have replaced some of the older occurrences, that may have held true for the strategy in previous decades. The Santa Clause Rally, yearend bonuses, holiday shopping and lower investor participation are just some of the reasons December is often positioned as one of the best months for equity market returns.

So should investors only trade equities in December and keep money in cash for the other 11 months of the year?  If we were to believe equity returns were aligned to seasonality, then that should repeat on an annual basis. Unfortunately though, we are unable to exclude black swan events, geopolitical tensions, climate change and even corporate news as influencing factors that don’t choose dates and times to occur.

Since 1901 the S&P 500 produced double-digit returns, both to the upside and downside, on 41 occasions. Of those 41 times, the index returned 13 positive double-digit months, while on 28 occasions the index declined by double-digits.  Now the reasoning we see more declines than advances can be explained on the basis that news drives market performance and bad news is likely to invoke an emotional reaction that results in excessive selling pressure whilst positive news is less likely to drive huge positive outperformance, unless the index is coming off an exceptionally low base such as post a sell off, or on the back of some seismic global news event such as the conclusion of a war. Of the 13 best performing months in S&P 500 history – 8 were between May and October, and of the worst 28 months on record – 20 were during the same period in question.

So what do these statistics conclude?  As much as there is an element of outperformance when looking at the recent longer term averages, if you had sold in May as per the adage then you would have likely missed 8 of the S&P 500’s best months on record, however you would have also experienced 20 of its worst months as well.

As much as there is an argument to follow the adage(strategy), financial markets are ever evolving and major market moving events can happen at any point during the calendar year so the best strategy any investor, invested in equites, should be following is to invest for the long term and by doing so, they are likely to smooth out returns over the invested period.

This strategy has enabled the Activ8 Group to positively and effectively grow our clients capital and we invite you to call us should you require any further information.