May 17, 2019 Equities

Sell in May? Or is it better to sit tight?

What lies behind the trading proverb "Sell in May and go away?" And is it really wise to clear out the accounts in May?

  • Stock markets are not only impacted by general economic trends and corporate profits, but also by seasonal cycles.
  • An old trading wisdom says that May rings in weak returns.
  • Although there are certainly seasonal trends such as the summer slump, seasonality should only be one of many factors influencing an investment decision.
4 minutes to read

The stock market world and the life away from the trading floor are sometimes polar opposites. While farmers place high hopes on the month of May ("When May is cool and wet, it fills the farmer's barn and barrel"), investors fear that thunder and lightning on the stock market can destroy their harvest. "Sell in May and go away" (from the stock market) is therefore a well-known piece of advice for investors who want to enjoy a carefree summer. But in no event should they forget to buy in again in autumn: "But remember, come back in September" is the second part of the saying, which although less widely known, makes the rule complete.

August and September are often very weak

But is it really good advice to avoid the markets in summer? Statistics do indicate the existence of a summer slump on the markets. Whether it is the German blue chip stock market index Dax, the leading US S&P 500 index, the European Stoxx Europe 600 selective index or the overall MSCI World stock market barometer: since 1980 (Stoxx Europe 600 since 1987), their performance is always worse between June and September than between October and May. Anyone investing in Dax solely between June and September would have only seen losses in the past almost four decades.

"Sell in May and go away ..."

But taking a closer look, we can see that it was only the months of August and September that were responsible for the poor performance of global stock markets between June and September. In July however, markets recorded average or even above-average growth.

"... but remember to come back in September"

Price seasonality should never be the sole criterion for an investment decision.

There are always exceptions to the rule

However, this still does not answer the question of whether investors should take seasonal factors into account. Statistical evaluations of the past are ultimately only one of many indicators for future stock market performance. All statistics have their outliers, and it is no different in the determination of seasonal factors like the summer slump. Another well-known trend, which has occurred often, but not always, is the end-of-year rally, where prices tend to climb with certain regularity during the last weeks of the year.

There are many reasons for such seasonal effects. Distribution dates for dividends (usually in spring) can play a role, as can reporting dates of balance sheets for stocks or tax requirements, which crank up the capital movements of investors. But there can also be simply less activity on the stock markets during the summer holidays. The lack of news to drive up share prices and weaker demand can make the markets drift. But at the end of the year, the stock markets usually benefit from the good seasonal mood of Christmas, which puts investors in a party and buying mood.

General climate crucial for market success

But careful: if you sell in May, you mustn't forget that seasonal price patterns are nothing more than probabilities for certain trends. In some years, patterns are offset by other factors, and should therefore be taken into account as only one of many factors influencing the investment decision.

Ultimately, the general climate of interest rate trends, profit performance of companies and economic outlooks have a long-term impact on stock market performance. Also, the longer investors hold onto their investments, the lower the impact of short-term fluctuations are on its performance.

The fact that not even professional investors are always able to determine the best time to buy or sell speaks against a withdrawal from the stock market in May. In addition to seasonal patterns from the past, there is also an immense variety of other influencing factors that must theoretically be considered in an informed decision. The risk of picking the wrong moment is therefore significant (Why market timing doesn’t really matter).

Investors often miss the time of re-entry

There is also the risk of missing the time of re-entry after a sale. From experience, many investors find it difficult to buy shares if prices have exceeded the original sale price. For many, perseverance and patience is probably the better recipe for success. Because there is one good thing about occasional price drops - it is often a good opportunity to top up the portfolio cheaply.

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