Since 1945, the Standard & Poor’s (S&P) 500 has returned, on average, 2% between the months of May through October. However, the same index produced an average gain of 6% between November and April. In more recent years, since 1990, these return figures have basically stayed the same, at 3% and 7%, respectively.
Alternate name: the Halloween Indicator
You’ll often hear Sell in May and Go Away mentioned alongside or interchangeably with “the Halloween Indicator.” This term came to be simply because if you follow the Sell in May and Go Away strategy, you’ll get back into the stock market in early November, right after Halloween. Setting an example that probably doesn’t apply to most people, this approach is thought to have originated centuries ago in the U.K., when wealthy investors would leave the stock market in May to spend their summers in the countryside, not paying much attention to their investment portfolios again until fall. The modern-day equivalent would be large investors, such as hedge fund managers, fleeing New York City for the summer to head to the Hamptons. But given the emergence of the internet and 24/7 trading, this summer-break effect might not be as pronounced as it once was when traders spent the majority of their working hours in places such as the floor of the New York Stock Exchange or a Manhattan office building.
How ‘Sell in May and Go Away’ Works
For the rest of us, following a Sell in May and Go Away plan would simply entail exiting our positions during this period of historical relative market underperformance between May and October and re-entering the stock market sometime shortly after Halloween. But, not so fast. As with most things trading and investing, there are both nuances and other factors to consider.
Do I Need to Sell in May and Go Away?
At the end of the day, Sell in May and Go Away is just another attempt to time the stock market. While it can work, it might be more trouble than it’s worth, particularly if you’re a long-term investor. Before we review some history, consider some history that’s still fresh. In May 2021, J.P. Morgan Wealth Management advised against Selling in May and Going Away. Here’s the firm’s rationale, published May 26, 2021: “[T]he summer months of 2021 should be anything but lackluster. The historically weak seasonal stock market performance may be overruled by the gains driven by the economic reopening, prompted by a federal stimulus, the Federal Reserve’s easy money policy, rising vaccination rates, falling COVID-19 cases, and rising Treasury yields.” A look at how the S&P 500 performed between that May date and the end of October 2021 shows that J.P. Morgan made the correct call. The main exchange-traded fund (ETF) that tracks the S&P 500 index, the SPDR S&P 500 ETF Trust, commonly known as SPY, closed at 419.07 on May 26. SPY ended October at 459.25, for a gain of 9.6%. This significantly outperformed the S&P 500’s historical annual average return of 3.3% between May and October since 1990. Also since 1990, the S&P 500 generated an average return of 8.3% between November and April. Add to this seminal research from the Netherlands in 1998 that found better stock market performance between November and April than between May and October in 36 of the 37 markets the study analyzed. A 2017 paper out of George Fox University in Oregon produced similar results regarding performance between the two periods but suggested a relatively aggressive strategy of shorting the stock market into summer and going long again come fall. However, the researchers conclude that the Sell in May and Go Away theory is little more than a “self-fulfilling prophecy,” given that traders and investors already anticipate a summer downside followed by a post-Halloween upside. In fact, between 2010 and 2020, you only would have benefited by Selling in May and Going Away in the year 2011. In every other year of that decade, you would have outperformed the market by somewhere between 0.8% and 13.9% by staying invested from May through October. Additionally, you might not hold investments in broad indexes such as the S&P 500. As Fidelity points out: “…since 1990 there has been a clear divergence in performance among sectors between the [two] time frames—with cyclical sectors easily outpacing defensive sectors, on average, during the ‘best [six] months.’ “Consumer discretionary, industrials, materials, and technology sectors notably outperformed the rest of the market from November through April. Alternatively, defensive sectors outpaced the market from May through October during this period,” according to Fidelity. While the firm suggests investors consider “sector rotation” based on this data, it urges caution and close consideration. Fidelity suggests it might make more sense to let go of winners come May that you don’t want to hold for the long haul and to use those profits to stick to your original investment strategy. J.P. Morgan gives essentially the same advice, warning that the tax consequences of moving in and out of positions so frequently could reduce any profits you realize by Selling in May and Going Away..
