“Sell in May and go away” has lost its usefulness.
An enduring saying on Wall Street, known as “sell in May and go away,” suggests that it is advantageous for investors to sell their equities at the start of May and reenter the market in November.
However, does that possess any legitimacy? Indeed, that is true, albeit its impact has diminished compared to the past.
In order to assess the veracity of this principle, commonly referred to as the Halloween indicator due to its suggestion of purchasing stocks immediately after October 31st, we collected comprehensive data on several categories of equities dating back to the 1950s. The groupings consisted of U.S. growth stocks, U.S. value stocks, large-cap and small-cap U.S. stocks, and international companies.
Using these categorizations, we subsequently examined two time frames: pre-2000 and post-2000 up until 2023. Within each of these specified time intervals, we analyzed the average returns and volatility for the period from May to October, comparing it to the remaining months of the year (January to April and November to December).
Individuals who followed the instructions saw particularly significant outcomes during the 20th century. For example, throughout the period from 1950 until the end of the 20th century, investors who held large-cap equities outside of the May-to-October period experienced an annualized return of 19.62%. During the May-to-October period, holding large-cap stocks resulted in an annualized return of 6.72%. The annualized difference amounts to 12.90 percentage points.
Furthermore, this exceptional performance was achieved with less risk. From 1950 to 1999, the average volatility of large-cap equities, excluding the period from May to October, was 12.44%. However, the mean level of fluctuation in the May-to-October timeframe for large-cap stocks was 14.14%. Consequently, the act of retaining stocks during the summer and fall months resulted in diminished profits accompanied by increased uncertainty, precisely as the saying suggests.
Transitioning to the time period from 2000 to 2023, we observe comparable, but reduced, levels of returns. However, the likelihood of danger escalates.
Investors who retained stocks outside the period from May to October achieved an annualized return of 13.29%. During the same time period, investors who retained large-cap equities from May to October could anticipate an annualized return of 8.64%. The annualized difference is 4.65 percentage points, indicating a positive return. However, it falls well short of the returns observed in the 20th century.
When examining volatility, it becomes apparent that the summer/fall months are no longer the periods with higher risk. From May to October, the average volatility of large-cap stocks was 17.50%. However, the mean level of instability exhibited by large-cap stocks from May to October was 14.31%. During the May-to-October period, holding equities resulted in lower risk compared to the remaining months of the year.
The findings were consistent across all stock styles examined.
Overall, it seems that the adage “sell in May and go away” still holds some validity in the 21st century, since one can indeed achieve larger returns by selling before the summer season commences and staying away until after Halloween. However, following the advise now entails increased risk.
