Should I Sell in May and Go Away?

By Megan Kowalski on May 23, 2023

For those who hate reading, the answer is NO. But keep reading to find out why.

This blog will cover a popular investment strategy, ‘sell in May and go away.’ The adage states there are six preferential months to be invested in the stock market, from November – April. Once the investor reaches May, they should sell and get back into the market after the summer months have passed.

What is driving this theory?

There has been significant data to support the theory of market outperformance from November to April. Take this graph below as an example illustrated by MarketWatch.

There is clearly a pattern of market outperformance throughout each of these periods outlined above. Although you can see that the spread varies from period to period, the overall trend still holds true.

The History…

This adage can be tied back to a well-known horse race established in 1776, known as the St. Leger Stakes². This horse race takes place in London every September and marks the end of summer for many British investors returning from their summer holidays. While this may have been the preliminary momentum that drove these characteristics. There are still many factors today, from summer vacations to the April tax filing deadline to many other seasonal factors, that still lend credit to this market behavior.

So with these distinct trends, why not join in and sell in May?

History is not Predictive

While there is historical data that supports the general trend, investors cannot solely rely on history to predict future events. Each period has various factors at play that need their own consideration.

Capital Gains

When investors opt to invest only from November to April, their investment will be considered short-term capital gains since it is less than one year. Capital gains that are less than a year are taxed at the investor’s personal income tax bracket, which generally is significantly higher. When factoring in the performance of this strategy compared to a long-term strategy, you will need to deduct the tax implications from your returns to calculate the real return.

The Comparison Distracts from the Real Strategy Alternative

When I first dug into this strategy, I’ll admit I was slightly intrigued. Do I want to take a summer holiday and get out of the markets? However, this strategy creates an illusion that distracts you from the real facts. Yes, it has been historically shown that the months of November through April have higher returns when compared to May through October. But the real question we need to be looking at is, are the returns from May to October negative historically? If the answer is no, there is no reason to implement this strategy. The real comparison needs to be between seasonal investing and long-term. When you run that comparison, this is what we found:

In each scenario, we found that this strategy would cause the investor to underperform when compared to long-term investors. When looking into the average return for the full period or just the seasonal strategy without taxes, long-term is ahead by roughly 2% on average, which adds up to a shortfall of almost 100% behind long-term investors over that full period.

In summary, no, you should not sell in May and go away. You will be leaving returns on the table unnecessarily.

I hope today’s blog has helped sharpe-n your knowledge of the investment landscape. If you have any topic suggestions or have further questions, please reach out to mkowalski@hightoweradvisors.com.

Source 1: https://www.marketwatch.com/story/sell-the-stock-market-in-may-and-go-awaynot-so-fast-say-experts-2019-04-30

Source 2: https://corporatefinanceinstitute.com/resources/capital-markets/sell-in-may-and-go-away/

Source 3: Data ran by The Lerner Group of historical S&P closing prices from 1972-2022