There is an old saying among investors, known as ‘sell in May and go away.’ The premise is that the market tends to deliver lower returns from May through October relative to the rest of the year, and investors would be better off just selling out of their stocks during that time. If you are watching Bloomberg or CNBC this time of year, you’ll probably hear the phrase mentioned by a random market strategist. The Wall Street Journal even published an article recently that suggested there was some validity to the saying. Although the adage is unlikely to disappear any time soon, it’s simple to debunk.

To demonstrate why the strategy is useless, we will focus on the large U.S. stocks of the S&P 500 Index. Doing so will allow us to take our analysis all the way back to 1926. The average annualized return for the S&P 500 over this extended period was 10.3%. We can see that the ‘Hold’ period of January through April, plus November and December, did, in fact, deliver a higher return on average than the May through October period (13.6% vs 7.1%).

Historical Returns:

(Jan 1926 through Dec 2023)

• Average Full Year Return:                     10.3%
• Hold Period (Jan-April & Nov-Dec):    13.6%
• ‘Go Away’ Period (May – October):     7.1%

Although the average return is higher during the ‘Hold’ period than the ‘Go Away’ period, that does not necessarily mean an investor could improve their returns by following the “sell in May and go away” strategy. This is because the adage fails to consider what the investor does with the money once they have sold their stocks. While the 7.1% that the S&P 500 has historically generated during the ‘Go Away’ period is indeed below the long-term average of the stock market, to determine if it is a wise strategy, you must first consider how that return compares to other investment options.

Average Return by Broad Asset Class During ‘Go Away’ Period:

(May-October months from 1926 through 2023)

• S&P 500:                     7.1%
• Inflation:                     3.5%
• Treasury Bills:            3.3%
• Government Bonds:  5.1%

As we can see, the 7.1% S&P 500 return during the ‘Go Away’ period is actually quite attractive relative to the broad asset class alternatives. Inflation has averaged 3.5% during these months since 1926. An investor that took the proceeds from their stock sale and stuffed it into their mattress or parked it in a modern-day checking account would have earned 0% interest and experienced a -3.5% decline in purchasing power. Investing in risk-free cash instruments like a Treasury bill, high-yield savings account, or CD would have been an improvement, but the 3.3% average return would have still trailed inflation historically. Even the 5.1% average return on government bonds would have materially trailed the ‘Go Away’ return of the S&P 500.

It’s clear that while the May through October period is a seasonally weak one for the stock market on average, selling stocks would not have improved returns historically. 

The other major factor that would debunk ‘Sell in May and go away’ is the costs associated with such a high turnover strategy. Liquidating your entire portfolio of stocks every six months will generate a hefty tax bill, particularly since the investor would be paying short-term capital gains rates. Trading costs would also materially impact returns in both taxable and non-taxable accounts. Even though most custodians no longer charge commissions on equity trades, an investor would still have to cross bid-ask spreads allowing the market makers to siphon capital away for profit. 

‘Sell in May and go away,’ like most market timing strategies, is unlikely to improve outcomes for investors. Ultimately, investors would be better served adhering to a different adage:

‘Time in the market instead of timing the market’

Week in Review

• The Producer Price Index (PPI), which measures the change in prices that manufacturers pay to their suppliers, rose .5% last month and 2.2% year-over-year in April, the highest annual rate seen since July of 2023. The PPI number was hotter than expected, as economists were forecasting a .3% rise in PPI last month. After the higher-than-expected PPI reading, market participants will pay close attention to CPI Data which will be released Wednesday, May 15th.
• Applications for unemployment benefits in the US increased by 22,000 to 231,000 for the week ending May 4th, which is the highest level since August of 2023. The report added further evidence of continued cooling in the labor market as job openings in March reached a three-year low, and the US Economy added the fewest number of jobs in six months in April.
• According to FactSet, 92% of the S&P 500 has reported Q4 results as of last Friday, May 10th, 2024. The earnings growth rate, blended between companies that have already reported with the estimates for those that have yet to report, is at 5.4% year-over-year, which is above analyst expectations of 3.4% going into this earnings season. The top five contributors to Q1 year-over-year earnings growth so far are Nvidia, Alphabet, Amazon, Meta, and Microsoft, while the biggest detractor to earnings growth for the S&P 500 was the healthcare sector, which has reported a -25.4% year-over-year earnings decline.

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Markets at a Glance

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Economic Calendar

Source: MarketWatch

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