May 2018 Market Update
Sell in May and Go Away?
Stock Market Summary: Signs suggest that the market correction that began in late January has been primarily sentiment-driven and is nearing its end. A healthy earnings season, led by the technology sector, could be just the medicine the market needs to resume its upward move.
“Sell in May and Go Away” is an old saying with its roots in actual historical experience. The idea is that you’d be better off to sell stocks in May and go on vacation until November. Of course, we prefer to invest based on research and time-tested strategies, not old adages. So let’s put the idea of selling in May to the test.
First, the table below looks at the average performance of the S&P 500 Index for each of the twelve possible six-month periods. It suggests that, indeed, the November—April period offers the best returns – positive 76% of the time, and with an average return of 7.1%. Meanwhile, summer months, led by the May—October period, are at the bottom of the list. Indeed, May through October has been positive less often than any other 6-month period, and produced much lower returns, averaging just 1.5%.
Looking at cumulative returns, on the other hand, shows how deceptive average returns can be. After all, we’re investing for the long term, and lower average results from May to October do not necessarily mean that being out of the market those months is a good idea. Let’s look at the long-term impact of having money in the market just from May—October, just from November—April, or year-round.
Sure enough, as the red line shows, having money in the S&P 500 only from May—October (earning an average 1.5% per year) yielded poor results; $100 invested from 1945 to 2018 would only have grown to $220. On the other hand, that same $100, invested from November to April each year, did far better, growing to $8,126.
The real surprise, however, is that keeping money in the market all year-round over that period saw $100 grow to $17,936, more than double the value of the November—April periods. In other words, what seemed like a pretty measly average return (1.5%) for those May—October periods ended up dramatically impacting long-term results.
Of course, taxes matter too, and this analysis doesn’t take them into consideration. Net after-tax investment performance is the bottom line, and we try to invest as tax-efficiently as possible, attempting to create long-term capital gains, which get favorable tax treatment. If we did adjust the above results for taxes, the difference would be even more striking, since selling everything after six months would result in short-term capital gains.
The bottom line? History—at least the last 73 years—suggests that, even though performance of the market from May—October has been far worse than from November—April, selling in May and going away would actually have been quite detrimental to long-term results.
Get In Touch
Share On Social Media
Other Recent Blog Articles
Written by Bruce Yates, Financial Advisor and Founding Shareholder Many investors assume that as long as they are right more times than they’re wrong, they will end up with good…Read More
By Joe Erickson, CPA and Viridian Shareholder Recent changes to tax law can have a significant impact on decision-making in the current real estate environment. This article describes some of…Read More