There is an old stock market maxim that says we should "sell in May and go away." Like most proverbs or cliches, it has a foundation in truth. From the 1950s to 2013, the Dow Jones Industrial Average saw lower returns between May and October before picking up around November to April.
But I did some research recently where I examined what would happen if you bought in May for 12 months the 8 best performing big (S&P500) stocks from Jan to May of that year. And the results looked great – about 38% returns in recent years. Even going back 20 years there were outstanding years. So is it ‘Buy in May and Go Away?’.
Anyway, I want to focus on the older maxim, ‘Sell in May’. However, since 2013, this once-reliable seasonal pattern has become less predictable. Indeed, the composition of indexes seems to be at play here. The S&P 500 is heavily weighted with tech stocks, so exiting the market in recent years would have mean lost gains in growth stocks.
Another factor to consider is that this May is a somewhat unique scenario. The COVID-19 pandemic crash, followed by the government stimulus-response, has led to extraordinary levels of growth. Timing the market is never easy, so investors risk missing out on returns.
Investors should know that stock returns do slow down in the summer months in British and European markets. However, there are a few caveats to this approach that investors should consider.
1)Nominal interest rates are currently lower than inflation. Additionally, real rates are negative. So, even if market returns lower during this six-month period, exiting into cash is a losing proposition.
2)Moving out of stocks generates taxes. If the plan is to dip out for the summer, then by back in November, investors should make sure their calculations are correct.
The Case For Going Away
Of course, some believe getting out this May could be a good strategy this year. Carter Worth, at Cornerstone Macro, suggests that stocks are toppy at the moment and believes there is some wisdom in exiting the market on this basis alone. Worth does go on to say that he considers a seasonal approach a poor choice and that leaving money exposed to the market is a better move.
Mark Yusko at Morgan Creek Capital Management suggests gains in commodities could lead to inflation in Q2. Additionally, he believes capital gains taxes and higher interest rates could lead to a rotation out of growth stocks and into value names.
While all of this is interesting, we can't escape that we're still in a bull market. While historically selling in May may have been wise, selling this May could mean missing out on significant returns. Failing to time the top and also facing a tax bill would be a double-blow.
Conclusion
There is still plenty of debate about "sell in May and go away". While past performance can give investors some clues to market movement, this is still a very unusual market.
While the US and UK have rolled out successful vaccine programs, globally, the COVID crisis is far from over. There is still some room for disruption.
However, as Ryan Detrick at LPL Financial notes, the data suggest that over the last ten years, a strong April usually means a solid next six months. For example, April gains of 5% in the S&P 500 have been followed by 6.2% gains from May through October.
With many companies posting high earnings, the market is bullish. Exiting the market carries a penalty of a tax bill, so the best thing for investors this year is to stay put, so they don't miss out on gains.
My own picks from ‘Buy in May’ I’ve posted on my Telegram channel: www.alpeshpatel.com/telegram
