The Data Don’t Support an Exodus
By Daniel Wiener, The Independent Adviser for Vanguard Investors
“Sell in May and go away.” It’s a catchy phrase, and sometimes it’s even accurate. But the market-performance statistics on “Sell in May” aren’t all that compelling.
It’s true that there’s a higher chance of seeing a 20% market correction between May and September than between October and April. But that’s a correction, only. And I will get into inter-year declines in a second.
That 20% decline is the worst case. And there’s only a 14% chance we’ll see a 20% correction after May. (There’s a 6% chance of a 20% correction during the supposedly better period.) The notion behind “Sell in May” is that the market goes down in the May-to-September period and then goes up in the October-to-April period. Historically, however, the stock market has gone up between May and September, not down. It doesn’t go up as much, historically, but it does go up.
So, should we “Sell in May” because that’s a period that traditionally has generated an average return, annualized, of 9.5% vs. the average annualized return from October to April of 15.6%? I wouldn’t. And maybe that’s why more people aren’t doing it. If they were, then the market would sink ahead of May and “Sell in May” would become “Sell in April” and then “Sell in March” and so on.
Now, as to those inter-year corrections. Our research team looked back over 30 years to 1980, a time when inflation and interest rates were at record highs, and asked the question: “What kind of inter-year losses have investors had to contend with over this period?” The chart tells the tale.
Over the 33 full calendar years illustrated here, investors saw declines during the year of anywhere from 3% in 1995 to 49% in 2008. The average loss (inter-year) over these 33 years: 15%. And yet, on a total return basis — meaning the combination of the changing price of stocks with the addition of any dividends they paid — stocks were up in all but 6 of those 33 years, and the average return in any calendar year was 12.6%. That includes 1995, when stocks gained 37.6%, and 2008 when they lost 37.0%.
Sell in May? No thanks.