The most dangerous phrase in all of investing is “this time it’s different”
One of the oldest stock market strategies is to “Sell in May and Go Away.” If you factor in this seasonal “strategy,” COVID-19 might make you think twice about employing. Especially on the heels of the best monthly performance for the stock market since 1987.
“Sell in May and go away” is a well-known trading adage that suggests that investors should sell their stocks in May to avoid a seasonal decline in the stock market. An investor selling his or her stocks in May would then buy stocks again in November because the November through April period shows significantly stronger growth in the market than the other half of the year.
Where did this “Sell in May and go away” advice originate? Not on Wall Street, but rather in London’s financial district. The original saying, “Sell in May and go away, come back on St. Leger’s Day” refers to a horse race. That’s right, a horse race.
The St. Leger Stakes is one of England’s greatest horse race and is run in late September. London traders would sell their shares, enjoy their summer, and return to the market after the St. Leger race.
The idea is based on seasonality and with this strategy, traders are only invested in the stock market for about six months of the year (November through April). These months are typically the strongest period of the stock market. Investors sell their stocks in May, save their money in cash, bonds, or another less risky investment, then buy stocks again in early November.
Statistics on this Strategy
As it turns out, stocks have done better during the winter-early spring period. According to the Stock Trader’s Almanac, since 1945 the S&P 500 has gained a cumulative 6-month average of nearly 2% from May through October on a price return basis. And for the 6-months from November through April, the S&P 500 has gained 6.7%, on average.
In addition, the S&P 500 has lost money in only 13% of the November-April time periods since 1945 and about 33% of the time from May through October. That success rate is remarkable. Maybe the horses are onto something after all?
But This Time It’s Different?
This is probably the most dangerous phrase in all of investing: “this time it’s different.” In fact, if you are discussing investments, the markets, or anything financial related and someone says this, don’t walk away, run.
- Most Recent Year: Looking at the S&P 500 from November 1, 2019 through April 30, 2020, the S&P 500 lost approximately 5%. Didn’t work.
- Last Year: Looking at the S&P 500 from November 1, 2018 through April 30, 2019, the S&P 500 returned approximately 8%. But if you sold out of equities in May 2019 only to get back in on November 1, 2019? Well you would have missed the S&P 500 returning 2.6%. Didn’t work.
- The Year Before That: Looking at the S&P 500 from November 1, 2017 through April 30, 2018, the S&P 500 returned 2.33%. But if you sold out of equities in May 2017 only to get back in on November 1, 2017? Well you would have missed the S&P 500 returning 7.83%. Really didn’t work.
This time it’s different? Utterly dumb. Especially when you consider what happened in April 2020.
Best Month Since 1987
Even though the S&P 500 was down 0.2% for the last week of April and even though the S&P 500 was down almost 5% from November 1, 2019 through April 30, 2020, it was still its best monthly performance for the S&P 500 since 1987. In fact, according to Factset:
- The Dow Jones Industrial Average (DJIA) is up 28% from its March 23rd low;
- The S&P 500 is up 27% from its low; and
- NASDAQ is up 26% from its low.
Explanations for the November-April Success
The reality is that there is a lot of money moving throughout the economy, and the stock market, from November through April. Here are some examples:
- Holiday spending: Halloween, Thanksgiving, Christmas, New Year’s Day, the Super Bowl, Valentine’s Day, Mother’s Day, etc. all come during those months.
- Back-to-school, Black Friday, and Cyber Monday sales.
- Employer contributions to employee retirement plans, almost all of which are invested in the stock market, through 401k and other retirement vehicles.
- Year-end employee bonuses.
- Tax refunds.
Limitations to this Strategy
Despite these favorable statistics, there are limitations to implementing this strategy.
- No one knows when to start: From 1988-2015, according to economist John Mauldin, the best strategy might have been “Sell in August, buy in mid-October”.
- With any strategy based on averages, any given year might show an extreme high or extreme low, a wave that a buy-and-hold investor could ride out.
- Investors lose short-term gains to taxes because short-term gains are taxed at your regular rate.
- Investors face additional transaction costs due to selling stocks and mutual funds, followed by buying stocks and mutual funds later.
Why “bet the farm” on a simple seasonal strategy having its origins in a summer break before a horse race? That would be like gambling…
Working with Your Financial Professional
The key to successful long-term investing, of course, lies in following wise strategies. Your financial professional should understand these strategies. It is generally best not to rely on interesting statistics that are not explained by actual market trends or economic analysis.
No specific investment strategy is foolproof. Your best strategy as an investor is not to base your plans on market timing or the season. Instead, focus on the traditional, sensible factors that include assessment of the business cycles, changing economic conditions, and news from the market.
Your financial professional an appropriate source for information about how to handle your money. He or she can help guide you in planning for the future.