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Sell in May and Go Away – Pros and Cons

What Is “Sell in May and Go Away”?

Sell in May and Go AwaySell in May and go away refers to the historical observation that the six-month period from November to April outperforms May through October. As a result, some traders subscribe to the technique of selling their stock investments in May, taking a summer vacation, and then re-entering the market in November. Historical data supports the theory of underperformance of particular equities during the summer six-month period beginning in May and ending in October.

Traditionally better market performance is observed in the winter six-month period beginning in November and ending in April. To follow this strategy, an investor would sell their equities holdings in May or late spring and reinvest in November or mid-autumn. Some investors believe that this technique is more profitable than being invested in the equity markets throughout the year. In theory, as the weather warms, lower volumes and a lack of market participants might lead to thinner trading.  In turn, there is potentially more volatility and greater risk.

Sell in May and Go Away – Origins

The adage, sell in May and go away is said to be derived from an old English proverb: “Sell in May and go away, and return back on St. Leger’s Day.” This expression alludes to a tradition of nobles, merchants, and bankers who would leave London during the hot summer months and flee to the countryside. The St. Leger’s Stakes is a thoroughbred horse race conducted in mid-September and the final leg of the British Triple Crown.  It is referred to as St. Leger’s Day.

American traders and investors are prone to spend more time on vacation between Memorial Day and Labor Day.  They have also embraced the term as an investment methodology. Moreover, for more than a half-century, stock market trends have validated the strategy’s hypothesis.

Sell in May and Go Away – Supporting Data

According to a 2017 Forbes piece, from 1950 until roughly 2013, the Dow Jones Industrial Average had an average return of only 0.3 percent from May to October.  This compares to an average gain of 7.5 percent from November to April. The precise reasons for this seasonal trading pattern are unknown.  Lower trading volumes during the summer vacation months and increased investment flow during the winter months were cited. This may be the single biggest factor in the performance disparity between the summer and winter periods.

According to Almanac data, since 1950 the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. The real fact of the matter is that the month for true market danger is September, with the Yardeni study showing an “average” decline of -1.1% and the Stock Trader’s Almanac showing -0.6%. (Source: forbes.com)

The supporting research 

Looking back over many decades, the markets have tended to only yield closer to 1% from May to October.  However, the returns jump to 5% throughout the winter months on average. The data for most nations ranges from 1919 to 2017. This has generally been true across 65 various nations where historical data is available.  Only Mauritius appears to be the exception where the norm does not appear to apply. Furthermore, the statistical evidence in the big rising economies of China and India is less robust but nevertheless points in the same direction. If you look at the worldwide stock market as a collective index, the rule has traditionally held up on average.

To answer the sceptics, we use all historical data (62962 observations) on all stock market indices worldwide to verify the robustness of the so-called Halloween Indicator or Sell in May effect. The effect seems remarkably robust with returns on average 4% higher during November-April period than during May-October. A new test for the effect offers some additional insights. Worldwide excess returns during summer seem negative (around -1%) and often significantly so suggesting a flat or negative risk return relation. Only for Mauritius do we find a significantly positive risk return relation during May-October. Our dataset also allows for a new (upper bound) estimate for the equity premium of around 4%. (Source: papers.ssm.com)

Sell in May and Go Away May No Longer Hold True

However, new studies indicate that this seasonal trend may no longer be the case. According to a May 2018 story in Investor’s Business Daily, if an investor sold shares in May 2016, she would have lost out on many profitable runs. The NASDAQ concluded April 2016 at 4775.36, rose in May, then skyrocketed in late June. From the end of June 2016 to the end of January 2018, the NASDAQ increased by 55%.

If you had decided to sell in May 2016 — with no rule for when to get back into the stock market — you would have missed out on some remarkable runs. The Nasdaq ended April 2016 at 4775.36. While it did show some roller coaster action over the next several weeks, it actually closed higher in May and then began to soar in late June. From the end of June 2016 through Jan. 26, 2018, the Nasdaq rose around 55%. In April 2016, Amazon was just breaking out of a cup with handle. If you had decided to sell in May, you would have gotten out right as Amazon began to soar 168% through March 16, 2018. As we enter May this year, Amazon is working on a later-stage base as it tries to keep climbing higher. (Source: investors.com)

Interestingly, while historical stock market returns have been higher from November to April, the gap isn’t as large as you might imagine. 2011 was the only year in the previous decade in which selling the S&P 500 from May to October put you in a better position than if you had kept invested.

Sell in May and Go Away – Bottom Line

Some analysts propose rotation rather than selling in May and leaving for a holiday. This approach requires investors to diversify their portfolios.  Rather, focus on securities that may be less influenced by the seasonal slow growth in markets.  For example, the technology and health sectors often remain stable throughout the summer and early fall seasons. For many individual investors with long-term aspirations, a buy-and-hold strategy remains the best option.  This means holding on to shares year after year until their fundamentals change.

Taxes

Taxes can eat away profits and short-term trading generally causes tax implications. If you trade your portfolio every six months there may be unintended tax consequences.  For example, turning over a portfolio twice each year may result in short-term profits rather than long-term gains. Even if the market stalls and the strategy works as planned, this might cancel out any possible gains.

What Wealth Managers Recommend…

  • Kiplinger – Most retail investors are likely best served by simply leaving their allocations alone.  The pros get judged on every basis point of return they can squeeze out of their holdings. But for us regular folks, portfolio churning – even in the age of commission-free trades – can still take its toll, be it in the form of opportunity cost or emotional stress.  Like most Wall Street sayings that encourage clients to trade, long-term investors would do well to ignore the “sell in May” chatter. Leave the tactical moves to the tacticians and trust your plan. (Source: kiplinger.com)
  • J.P. Morgan Wealth Manager – For most investors with long-term goals, keeping your equities yearlong is likely the best move. Not to mention the potential tax consequences it saves you from; selling stocks every April 30 may force you to pay short-term capital gains taxes that can eat away at whatever occasional benefit you might gain from “selling in May and going away.” (Source: chase.com)
  • Investor’s Business Daily – Just like a broken clock is right twice a day, market maxims like “sell in May and go away” can prove prescient in some cases. But they can also be dead wrong. So to keep the odds of success in your favor, stick to a sound game plan based on what the market and leading stocks are actually doing, not on what any pundits or proverbs say they “should” or “will” do. (Source: investors.com)
  • Merryl Lynch – In April 2017, analysts at Bank of America Merrill Lynch examined three-month seasonal stock market data.  The figures date back to 1928.  The data revealed that June through August was traditionally the second-most active time of the year.

Up Next: What Is a Grantor Retained Annuity Trust (GRAT)?

GRATA grantor retained annuity trust (GRAT) is a financial tool used in estate planning to reduce taxes on substantial financial transfers made to family members. In these arrangements, an irrevocable trust is established for a specific length or period of time. When the trust is formed, the individual who creates it determines a gift value. The trust is funded with assets, and an annuity is provided to the donor each year. When the trust ends, the final annuity payment is made.  At this point, the beneficiary receives the remaining assets while paying little or no gift taxes.

A Grantor retained annuity trust (GRAT) allows a trustmaker to pass on increasing assets to the next generation.  He can do this with little to no gift or estate tax repercussions. GRATs allow wealthy families to freeze the value of their estate.  Thus transferring any future appreciation to the following generation tax-free. Furthermore, GRATs have few drawbacks and little downside. A GRAT is formed when a grantor gives assets with the potential for appreciation to a fixed-term, irrevocable trust. The grantor then maintains the right to receive an annuity stream for the duration of the trust. The assets are dispersed to noncharitable beneficiaries at the conclusion of the period.  Often, these are the grantor’s children.

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