Sell in May and Go Away

What is Sell in May and Go Away?

An investment strategy based on the theory that the stock market underperforms in the six-month period between May and October – Sell in May and Go Away refers to a well-known adage in the business and financial world.

Stock markets have previously underperformed in the six-month period between May and October. In contrast, the period between November and April sees much stronger stock market growth.

How It Works

If investors follow the Sell in May and Go Away strategy, they sell stocks at the start of May (or during the late spring) and have the proceeds held in cash. Then, the investors would invest again in November (or in the late autumn). By adhering to this strategy, the investors would avoid holding stock during the summer months.

History of Sell in May and Go Away

“Sell in May and Go Away” has its origins in England or, more specifically, in London’s financial district. The original phrase was “Sell in May and go away, come back on St. Leger’s Day,” with the latter event referring to a horse race.

Established in 1776, the St. Leger Stakes is one of the most well-known horse races in England, being the last leg of the British Triple Crown and is run at the Doncaster Racecourse in South Yorkshire in September of every year. In its original context, the adage recommended that British investors, aristocrats, and bankers should sell their shares in May, relax and enjoy the summer months while escaping the London heat, and return to the stock market in the autumn after the St Leger Stakes.

In the U.S., some investors have adopted a similar strategy by refraining from investing during the period between Memorial Day in May and Labor Day in September.

Alternative Strategies

One alternative to Sell in May and Go Away recommended by analysts would be to rotate and vary portfolios instead of selling investments in May. Such a strategy would involve investors focusing on products that are less impacted by the lack of growth in the summer months.

A second alternative for investors with long-term goals and future-oriented investment outlooks would be to simply buy-and-hold and not sell their investments in the spring but keep them within their portfolio year-round every single year unless they choose to change their strategy.

Relevant Statistics and Considerations

Historical data have generally supported the “Sell in May and Go Away” adage over the years and since 1945. The S&P 500 Index has recorded a cumulative six-month average gain of 6.7% in the period between November to April compared to an average gain of around 2% between May and October. Furthermore, the S&P 500 typically generates positive returns roughly two-thirds of the time from May to October, while that percentage rises to 77% from November to April.

Seasonal factors play an important role here, as end-of-year bonuses and the Santa Claus Rally, which refers to the stock market’s tendency to rally over the last few weeks of December into the first few months of the new year. Some theories behind it include increased holiday shopping, optimism and morale fueled by the holidays, or investors settling their books before going on holiday. While February and March are relatively mild in terms of growth, the stock market generally lifts in April due to the anticipated release of the first-quarter reports.

In contrast, the period from May to October tends to be less optimistic, with first-quarter results over and many people spending less time paying attention to stocks as they go on summer vacation. In addition, in election years, there tends to be a weakness of the stock market in September and October due to the uncertainty of the election results.

However, it should be noted that returns have often varied in these time periods, and there have been many exceptions. Many factors behind the uniqueness of each period include socio-economic conditions, the business cycle, and the market environment, which has a large impact on stock market volatility and might invalidate this strategy.

For example, the COVID-19 pandemic has profoundly affected the stock market, and in the period between November 2019 and April 2020, normally known for a period of high returns, there were poor returns. Some of the factors resulting from the pandemic that would impact the stocks include the lockdowns and other attempts to contain the spread of the coronavirus, as well as the fiscal and monetary response to combat the negative economic impact of the pandemic. Due to such events and factors, it is perhaps better not to think of the adage as a fixed rule but a trend that has interesting insights and results and should be examined.

Article reproduced from The Corporate Finance Institute

Scroll to Top