Should You Sell in May?

May is upon us, and so with it the dreaded "Sell in May and Go Away" anomaly, which suggests that we should all go in a bunker and hibernate from equity markets for six months.  In general, it is true that if you had only invested in stocks over the November to April periods and gone to cash during the May to October periods, you would have done very well over the long-term.  But it's also not so clear cut.  The six month seasonal tendencies in the stock market are more potent when looking through the lens of the Presidential Election Cycle.

For example, we wrote all last summer and into the fall about how special the upcoming November to April period after the mid-term election would be (based on our historical analysis).  The period had a median return of 16%, without a down period since before 1950.  We still have a day yet to close out the November to April period, but it looks like the return is about in line with the average right now at approximately 15% at the time of this writing.

What about the May to October period?  It's true that over the period since 1930, the May to October period has averaged a little under 2%, while November to April returns have averaged over 2.5 times that.  It sounds simple, but averages can be deceiving and tough to live with when one of those May to October periods is up more than 20%, and you watch the market scream higher while holding cash.  Instead, if we look at the May to October periods in conjunction with the Presidential Election Cycle, both seasonal anomalies become much more useful.  Furthermore, if we add in the November to April periods, here's the picture that we find.

Both the "Sell in May" and the Presidential Election cycles boil down to one big lesson.  Avoid that May to October period in a mid-term election year like the plague, and get uber-bullish come November of the same year.  That's it.  Take those two pieces of the puzzle out, and there is not much left to make your pupils dilate.

To view today's complete Market Comment, click here.

Mark Dodson, CFA

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