If you’re like most investors, you’re already planning on scaling back on your exposure to the stock market within the next couple of days, heeding that long-touted advice to “sell in May and go away.”
And why not? We’re about to enter what’s mathematically been proven to be the slowest (and most unfruitful) six months of the year for stocks. Why bother beating your head against a proverbial wall?
There’s a bit of a flaw in the theory, however, which ultimately leads to this nugget of stock advice: It might not be in your best interest to sell in May and go away.
A look at the more relevant data will illustrate why.
The Rest of the “Sell in May and Go Away” Story
To be fair, there’s a basic degree of logic behind the idea of simply skipping the summer and fall months altogether and doing most of your trading on the other six months of the year.
That logic is based on the fact that, on average, there’s not a lot going on in any of these months. Worse, when adding all those averages up, there’s no denying the coming six months — again, based on averages — are an unusually anemic period of the year.
Take a look at the actual data calculated for each month going back for more than 60 years:
The flaw in the thinking is the assumption that every tepid May is followed by a tepid June, that every tepid June is followed by a tepid July, and so on.
But that’s not how it is in the real world.
In the real world, a tepid May for any given year could be followed by a red-hot June and July. Conversely, a bullish July could easily be followed up by a horrifyingly bearish August and September. You wouldn’t know it, though, as the sum of all the averages tends to wash out the volatility that could actually be an opportunity.
The more scientific way of deciding whether you want to sell in May and go away would start (and finish) with a calculation of the total returns for the entire six-month period in each year. So that’s what we did.
The table below calculates the S&P 500’s changes for the entire May-through-October period for each year going back to 1985.
Though the average gain for the entire five-month span is still a lackluster 1.7%, clearly not every year is a wash. In fact, the market usually makes a gain over the course of summer and early fall. In just the past 30 years, it has made some sort of gain 21 times, with some of those gains being quite sizable.
Yes, some of the losing years doled out sizable losses too. Put them in context, though. In the worst five years on the table above (2008, 2002, 2001, 1987, and 1990), we were in recession-driven bear markets. Stocks should have been pointed lower.
When we’re in bull markets and/or economic expansion phases, the market actually has a solid track record of doling out big gains during a time that’s supposed to be lethargic.
Some Free Stock Advice
The moral of the story is, don’t be too quick to assume the worst — it might not be in your best interest to sell in May and go away. It actually takes quite a bit to push the market lower for the entire six-month span that kicks off at the end of this week.
While valuations are admittedly a bit frothy as we head into May of this year in addition to stocks being technically overbought and ripe for a pullback, we’re not exactly in dire straits.
Any dip in May could easily end up being a buying opportunity for the following five months.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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