by Daniel Putnam | May 2, 2013 12:30 pm
You might not have heard this before, but we’re all supposed to “Sell in May and go away.”
What could be easier? Just invest for half the year — the correct half, of course — and your performance numbers will be outstanding … right?
No, the truth of the matter is that the “Sell in May” concept is distorted somewhat by the use of long-term average returns.
Consider this: According to Fox Business Network, the S&P 500 has averaged a return of 1.2% in the May-to-October interval since 1945, compared with 6.9% from October through April. The gap in the incidence of positive returns in each period is also large, but — importantly — it’s not as dramatic: Stocks have produced a gain 63% of the time in the May-October period, and 78% of the time from November to April.
This suggests that the average is skewed to a certain extent by the presence of a few large numbers. And the facts bear this out.
Stocks were hammered in the May-September periods of 2001 (-16.7%), 2002 (-24.3%), 2008 (-15.8%) and 2011 (-17%). Each of these periods of poor returns were the result of specific events: the bursting of the tech bubble, the housing crisis and trouble in Europe, respectively. The 1974 bear market collapse also created an outlier number: a loss of 29.64% from May through September.
Once these numbers are taken out of the equation, the average 40-year return in the period recovers to about 3.5% — still not as strong as in the rest of the year, but not a reason to move into cash, either.
Another fact to consider is that in the past 40 years, the S&P hit its high for the five-month period in May on only nine occasions, seven of which have occurred since 2001. In reality, the index has been much more likely to hit its peak in September — something that has happened on 14 occasions. The S&P 500 also hit its high three times in June, eight times in July and six times in August.
This demonstrates that there’s still plenty of room for upside in the warm-weather months.
One reason why the “Sell in May” story receives so much media attention is that the May-September interval has brought a high frequency of severe downturns in the recent past — which is what investors remember the most. But even during the past 12 years — when selling in May would have added substantial value in terms of boosting average returns — the S&P finished higher on seven occasions.
Click to Enlarge Also, the monthly return data shows that the S&P 500 finished with a gain in 34 of the 60 May-September months in this 12-year period, including a four-year stretch (2003 through 2006) in which the S&P finished with a negative monthly return in only four of the 20 total months. (The 12-year monthly return data for the May-September period can be viewed in the accompanying enlargeable table.)
The takeaway: Even in this stretch of extremely poor performance through the warm-weather months, the market still finished higher the majority of the time.
The media has gotten carried away with its analysis of the headline trend, which needlessly frightens investors into making poor decisions. This time of year has actually been profitable from a buy-and-hold standpoint more often than not.
The market might indeed lose steam in the coming months, but if it does, the slump will be the result of slowing economic growth or an unforeseen crisis — not the time of year.
Source URL: http://investorplace.com/2013/05/sell-in-may-and-go-away-the-real-story/
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