Does the old stock market adage Sell in May and Go Away actually work?
The financial world often relies on inherited wisdom, but the Sell in May strategy is one of the few that actually holds up under scrutiny. While the summer months historically yield lower returns than the winter, testing these market rules yourself is the only way to build a reliable strategy.
The Halloween Indicator, or the Sell in May and Go Away adage, suggests that investors should exit the market during the summer months. Statistical analysis of S&P 500 monthly returns from 1928 to the present shows that the November to April period averages a 5.1% return, while the May to October period averages only 2.1%. This trend is not limited to the United States; a study by Jacobsen and Bouman, updated in 2009, found this effect present in 36 out of 37 developed and emerging markets examined.
The phenomenon is particularly robust in European markets, with evidence in the United Kingdom dating back to 1694. However, while summer returns are lower, they remain positive on average, meaning that exiting the market entirely may not be the optimal move for every investor. The discrepancy between market signals highlights a broader conflict: while bond and commodity markets anticipate a long period of low growth, equity markets have been pricing in a strong rebound, largely driven by liquidity support from central banks rather than fundamental corporate earnings.
The current market environment, as noted by Howard Marks of Oaktree, presents a disconnect between stock prices and global economic reality. With the market down only 15% from its February 19, 2020, all-time high, many observers argue that the recovery speed is inappropriately positive given the scale of the economic shock. Ultimately, the lesson is that investors should not blindly follow adages. Because market data is readily available, any testable investment rule can be verified in minutes. Relying on personal data analysis is a far more effective way to develop a winning strategy than relying on market folklore.
Source: Sell in May And Go Away?
