Should You “Sell in May and Go Away”?
May has certainly been a rocky month on Wall Street. The S&P 500 and Dow both set new all-time highs early in the month, but after that, it was a rollercoaster ride of ups and downs that left many investors clutching their stomachs.
Still, investors whipsawed by recent market action may be tempted to follow the old Wall Street adage, “Sell in May and Go Away,” as we enter the notoriously weak summer months. If you’re unfamiliar with the saying, it has roots in the fact that the stock market is historically the strongest between November and April, and in turn, weaker between May and October.
The reality is that trading volume is typically lighter during the summer months simply because many folks are on vacation. Interestingly, the phrase's origin goes back hundreds of years to England when bankers, merchants, and aristocrats discovered profits dwindled during the summer when Londoners escaped the city's heat in favor of the countryside.
The original phrase was “Sell in May and go away, and come back on St. Leger’s Day.” St. Leger’s Day falls in mid-September and marks the final leg of the British Triple Crown horse race. Here in the U.S., this summer period falls between Memorial Day and Labor Day.
Now, a lot has certainly changed in the centuries since England initially coined the phrase, and one has to wonder: Does the “Sell in May and Go Away” strategy hold up today?
According to The Stock Trader’s Almanac, the Dow has climbed an average of 0.3% between May and October since 1950. In comparison, the Dow has risen an average of 7.5% between November and April. The S&P 500, on the other hand, has posted an average 0.1% decline in June, an average 0.9% gain in July, and a 0.04% drop in August between 1950 and 2011.[1]
Forbes also recently revealed that the stock market had posted an average gain of about 1% between May and October based on data from 1919 to 2017. Of course, the period between November and April was much more robust, with an average gain of about 5%.[2]
The Stock Trader’s Almanac and Forbes have both shown that the stock market’s gains are pretty anemic during the summer months. However, it’s important to note that this research also confirmed the Dow and S&P 500 can still trek higher on light trading volume during the summer.
Yardeni Research even pointed out that the summer months aren’t necessarily the worst months for the stock market. Based on data compiled since 1928, Yardeni Research reveals that May, February, and September are historically the weakest months for the S&P 500. July is one of the best months for the S&P 500. Consider the chart below.[3]
If historical precedence would hold for the summer of 2021, then June, July, and August could be decent months for the stock market. And folks who jump on the “Sell in May and Go Away” bandwagon could miss out on three months’ worth of profits.
It’s also important to understand that there are tax implications if you were to “Sell in May and Go Away.” You may be locking in short-term gains, but you’re also paying a higher tax rate on the assets if you haven’t held for at least a year. Remember, short-term capital gains are taxed as ordinary income, while long-term capital gains are taxed between 0% and 20% based on your tax bracket.
Here at Nicollet Investment Management, we always recommend that long-term investors stick to their financial plan and not veer off course. One of the biggest mistakes investors make is tweaking their financial strategy based on market pundits’ predictions. Instead, we advise staying the course. A sound investment strategy will help you achieve your financial goals, not Wall Street adages.
Give us a call at Nicollet today, and we’d be happy to discuss how you can achieve your financial goals with a long-term investment strategy.
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[1] https://www.forbes.com/sites/davidwismer/2013/09/01/sell-in-may-worked-or-did-it-and-other-quotes-of-the-week/?sh=4ca425116284
[2] https://www.forbes.com/sites/simonmoore/2021/05/01/should-you-sell-in-may-and-go-away-in-2021/?sh=78cc710e2f4e
[3] https://www.kiplinger.com/investing/602700/sell-in-may-and-go-away-here-we-go-again