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VOL. 128 | NO. 100 | Wednesday, May 22, 2013

Mark Sorgenfrei

The 'Sell in May' Story

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The “Sell in May, and Go Away” slogan is common vernacular within the investment sphere. However, for some of our readers who might not be as familiar with this phrase, we will use this week’s writings to review.

As the summer season moves into focus, the normal rhythm of the daily routine shifts into a more scattered affair for many areas that are influential on the financial markets. From May through October, the normal monthly economic data releases (employment figures, GDP, consumer confidence, etc.,) continue unabated. On the other hand, there is only one complete earnings reporting cycle, as the majority of second quarter earnings figures are reported from mid-July through August.

Furthermore, everyone from Wall Street analysts to retail investors takes some time to enjoy the beach, mountains and Disney World. Even Washington traditionally stays low key, as Congress has a summer recess, the initial post-election legislative burst has subsided and the new election season does not gear back up until the fall. (However, based on the flurry of news currently emanating from our nation’s capital, something tells me that this summer will be anything but low key, as things are apparently just beginning to heat up.) Put it all together, and the calendar has produced some interesting historical returns, occasionally influencing investors to sell their stocks in May, sit out the summer and redeploy the cash in the fall.

Here are the average monthly returns for the S&P 500, viewed through the prism of “since 1928 (includes the Great Depression)” and “since 1950” (the post-World War II era):

More broadly, if we look at the average performance of the S&P 500 for multi-month periods over the same two timeframes, the discrepancy does become greater:

While both six-month timeframes have produced positive returns on average, the size of the positive returns found in November through April definitely favors the “Sell in May” sentiment.

More recently, the data has definitely been mixed. If we compress the lackluster season further to five months (May – September), the data reveals that a “Sell in May” strategy in 2001, 2002, 2008 and 2011 would have allowed an investor to avoid average losses of 18 percent. However, deploying that same philosophy in 1997, 2003, 2005 and 2009 would have caused the same investor to miss out on average gains of 15 percent.

To summarize, while the calendar has provided discrepancy in returns, there are plenty of variances in the data. Furthermore, the calendar is only one of the factors (and probably one of the more minor ones) that influences market behavior. See our previous iterations for more meaningful market movers, and remember that the key to investing success is to stick with a prudent investment philosophy that is built for long-term success.

Mark Sorgenfrei Jr. is vice president and investment analyst for Waddell & Associates Inc.

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