Mitch's Mailbox

May 10th, 2019

Is there anything to the “Sell in May” adage?

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Bryan W. from Santa Fe, NM asks: Hi there Mitch – I know the “Sell in May” adage isn’t a real trading strategy, but I saw some of the statistics on it over the weekend, and it looks to me like it actually works really well. You cite historical statistics all the time in your writing. Could you shed some historical light on this adage?

Mitch’s Response:

Thanks for writing, Bryan, and I think I’m familiar with some of the statistics you’re referencing for “Sell in May.” Like, for instance: since 1950, an investor who put $10,000 into the S&P 500 from May 1 to October 31 would have $4,138 – an actual loss of more than half the money. However, if that same investor had put $10,000 to work only in the remaining months, from November 1 to April 20, they would have realized a gain of $2,836,350!1 The numbers are similar if you look at the Dow instead of the S&P 500.

So, based on this data, “sell in May and go away” seems like a pretty sure thing. But the counter argument, in my view, is much more compelling. That is, what is the real benefit of trading in your accounts based on a pattern that has no basis in economic fundamentals? It’s a form of market timing, with transactional expenses and maybe tax consequences, which does not necessarily add to your total return over time, but may or may not give it a boost?

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See How Market Timing Can Affect Your Retirement?
 
There is one big problem with market timing — study after study shows that the average investor is a poor market timer. In many cases, investors allow emotions and media noise to get the best of them, selling in and out of the market at the wrong times.

Our guide, “How Market Timing Can Affect Your Retirement Plan2” seeks to explain these behavioral traps and offers potential solutions. If you have $500,000 or more to invest and want to learn how you may be able to avoid these mistakes today, click on the link below to get your free copy:
 
Download Zacks Guide, “How Market Timing Can Affect Your Retirement Plan.2

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To me, I have a hard time seeing why an investor would not have just stayed in the market from 1950 through today with no timing tactics. Wouldn’t the total return in the account be almost as good if not slightly better if the investor had simply stood pat?    

Studies on the “Sell in May” pattern that dig a little deeper actually do not find that summer months are negative on average, just that they are less positive than the November to April months.3 Last time I checked, growth is growth! I’m not sure why it would make sense for an investor to potentially miss out on further gains just because of a calendar quirk that only works sometimes.

Second, markets do not really follow calendars, and I believe investors shouldn’t either (unless you are making some changes for tax purposes at the end of a given year, perhaps). While statistics may show that May–August is generally a weaker period, there are also instances where it was a relatively strong period. In my view, investors would be assuming more risk trying to time the market than just focusing on a longer-term strategy and outlook.

That brings me to a final point, which is economic outlook. In my view, the outlook right now for the global economy and the U.S. is positive. At Zacks, we believe that corporate earnings are set to accelerate in the coming quarter or two or three, which could give some further positive momentum to stocks. Overall, we think the U.S. economy is set to grow modestly as it has in recent years, and that the world should follow suit. While a forecast for positive global GDP growth in 2019 does not ensure that stocks will go up in the next three months, it does in my view make the case for owning equities to the extent that your investment objectives and risk tolerance allow for it.

At the end of the day, in my opinion it is not worth the transaction costs and potential opportunity costs associated with trying to time the market over a three-month period. I’d rather take the longer view, set my course, and stick to it.

But before making any big decisions, I recommend reading our guide, “How Market Timing Can Affect Your Retirement Plan4.”

This guide seeks to explain emotional and behavioral traps that investors can fall prey to and offers potential solutions to common mistakes that many self-managed investors make.

If you have $500,000 or more to invest, and want to learn how you may be able to avoid these mistakes today, get your free copy by clicking on the link below:

Disclosure

1 CNBC, May 1, 2019. https://www.cnbc.com/2019/04/30/sell-in-may-and-go-away-maybe-not-this-year.html
2 ZIM may amend or rescind the “How Market Timing Can Affect Your Retirement Plan” guide for any reason and at ZIM’s discretion.
3 Barron’s May 1, 2019. https://www.barrons.com/articles/sell-stocks-in-may-and-go-away-51555611863
4 ZIM may amend or rescind the “How Market Timing Can Affect Your Retirement Plan” guide for any reason and at ZIM’s discretion.
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