How much truth is there to the “Sell in May” maxim, and how much should investors fear for their money in summer? asks Jim Kelleher, director of research at Argus Research.
Summer, or specifically beginning-of-June through end-of-September, is usually a dead-money period. But only investors with inordinate and warranted confidence in their market-timing instincts and ability to anticipate trading trends should actually exit the market in summer.
While the middle third of the year often represents dead money, you do want to be invested in the first third and particularly the last third of the year. Beyond the costs and complications of seasonally rotating out of and back into stocks (not to mention the impeccable timing required), the “Sell in May” period is just unpredictable enough to warrant staying invested through the dog days.
We looked at S&P 500 performance across the “Sell in May” period from 1980 through 2017. Note that May itself is not a bad month, posting average capital appreciation of exactly 1.0% from 1980 through 2017. The problem is with the four subsequent months.
Since 1980, June has averaged a fractional decline (off 0.03%) on the S&P 500. July is the best summer month; buoyed by the optimism of 2Q reporting season, July averages a 0.91% gain since 1980. But August averages a decline of 0.16% on the S&P 500; and September is the worst of the bunch, averaging a 0.75% decline.
Netted out, the change in S&P 500 from 5/31 through 10/1 has averaged about 1.0% since 1980. That is not much of a gain for a full third of one year.
There are of course many variations. The most encouraging trend is that summers have been a lot more productive during the current bull market than on average. Since 2009, the June-September period has averaged a gain of 3.3%. Summers in the current millennium, by contrast, have been a tough slog. Since 2000, the June-September period has averaged a decline of 0.4%, pulled down by the 2000-02 internet implosion and 2008-09 great recession.
Of more concern is the pattern of summer performance following a weak winter and spring. Between 1980 and 2017, stocks averaged a gain of 4.2% between the first of the year and the end of April.
But in 17 of those years, stocks got off to a poor start, which we define as ranging from half that gain (2.1%) to any amount of decline. For those 17 years, the summer performance was an average 0.5% decline. That is not a good omen for this year, as the S&P 500 inched up by just 0.3% from 1/1/18 and 4/30/18.
Finally, the usually sleepy summer is about to be disrupted by raucous and uncommonly partisan campaigning ahead of the mid-term elections. Mid-terms are often a time when first-term presidents see a tenuous Congressional majority slip away.
The mid-terms in 2018 could be particularly interesting as a wave of Republican retirements potentially flips the House to blue; yet many more seats that must be defended by Democrats than by Republicans could lead to a fattened GOP Senate majority.
Whatever the political implications, mid-term summers have not been good for stocks. In the nine prior mid-term years since 1980, the S&P 500 has averaged a 1.6% decline in the June-September period.
How seriously should investors take “Sell in May?” Calendars, after all, should be used for daily planning, not for setting an investment agenda. At the same time, we remain attuned to market patterns because we know so many other investors are as well. Any kind of market upset can push investors to furiously mean-revert, even to a hoary old bit of wisdom about sitting out the summer market.
Despite the seasonal theme that so many times has stopped stocks in their tracks, we believe current positive fundamentals supersede current market challenges. We would take advantage of recent weakness in stocks that, along with rising earnings, is rewinding the valuation spring to more-attractive levels. Rather than sell in May, we would look to buy likely weakness in June.
