Saturday, April 30, 2016

Sell In May, But It Is A Presidential Election Year

With May just around the corner, articles covering the "Sell in May' phenomenon are not in short supply and this article will add to the list. Sometimes the strategy is referred to as the Halloween indicator as investors are expected to get back into the market after Halloween. On the surface, it seems pretty clear that a Sell in May strategy is one that bears fruit for investors. In an article from Chart of the Day from several years ago, it is noted,
"The stock market is about to enter what has historically been the weakest half of the year. Today's chart illustrates that investing in the S&P 500 during the six months of November through and including April accounted for the vast majority of S&P 500 gains since 1950 (see blue line). While the May through October period has seen mild gains during major bull markets (i.e. 1950-56 & 1982-97), the overall subpar performance during the months of May through October is noteworthy. Hence the saying, 'sell in May and walk away.'"
From The Blog of HORAN Capital Advisors

The above chart provides pretty clear evidence of the strength of the market from November to April or the weakness from May through October. However, evaluating the magnitude of the performance difference between the two periods is important. Jeff Miller, PhD, the author of the Dash of Insight blog, has noted,
"The seasonal slogans often substitute for thinking and analysis. The powerful-looking chart...actually translates into a 1% monthly difference in performance. The "good months" gain 1.3% on average while the "bad months" gain about 0.3%. 
To make a wise decision you need to make an objective quantitative comparison between the economic trends and the small seasonal impact. The Great Recession has been followed by a slow and plodding recovery. We have an extended business cycle with plenty of central bank support."
The below chart displays the average returns for various intra-year periods.

From The Blog of HORAN Capital Advisors

One aspect of the of the May to October period is the fact downside volatility is greater. According to a recent article from Charles Schwab, in secular bull market periods the May-Oct. performance range is -13% to 20%. The return range in the Nov.-Apr. period is -5 to 24%. Investors should note, the strategy is not full proof. In the same Schwab article just referenced,
"The “strategy” did not work for the three years from 2012-2014, or for the five years from 2003-2007, when there were gains between May and October in each year. In addition, as you can see in the [table in the article], there is a meaningful difference between how the market performs from a seasonal perspective in secular bull or secular bear markets. Average gains and the percent of positive cases have been higher in secular bulls than in secular bears (even if they are still lower than in the November through April period)."
So certainly, a "Sell in May" strategy has historical validity, but the weaker return in the May to Oct. period does not mean the returns will be negative. Take under consideration we are in a presidential election year, and yes, the May to Oct. period is the strongest.

Source: MarketWatch

The "sell in May' strategy is certainly not as clear cut as the adage states. Additionally, with all the focus on the strategy now, the market tends to enjoy proving the consensus wrong.

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