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Corona blog Geert Van Herck :
Sell in May and go away: good or bad idea?

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You have certainly heard this stock market adage before: 'Sell in May and go away'. This persistent 'advice' tells us that the stock market doesn't really do much between May and October. During these months, investors would therefore do better by stepping aside for a while. But is this a successful strategy, statistically speaking?

Let's start with a quick analysis using the table below. This shows us the returns on the S&P 500 for various six-month periods since 1950. The best periods do seem to be from November to April. The index gains an average of 7% then. The period from May to October is bottom of the list, and we can see that it achieves only a fraction of the returns seen during the best period. This makes some stock market strategists decide to sell up in May and come back in November.

Table 1 : returns S&P 500

Source: LPL Research

But does it really make sense? The table actually gives us two reasons to remain invested from May to November.

  1. The return is positive, coming in at an average of 1.5%. So is getting out of the market such a smart move to make?
  2. In 64.3% of these periods, a positive return was achieved. That is nearly a two-thirds majority.

With these statistics in mind, we do not feel it is a winning strategy to simply drop out of things for the next six months. And certainly not if we look at the returns over the last ten years more closely.

Table 2 shows us the returns on the S&P 500 from May to October for the last ten years. We can see that this confirms the above statistics. In seven of the ten years, there was a positive return. Only in 2011 was there a negative exception, and it is hard to view the -0.3% in 2010 and 2015 as truly negative. That was more keeping the status quo.

A sensible investor would do well to avoid over-simplified stock market adages!

Table 2: returns S&P 500 (May-October)

Source : LPL Research

Does this mean that we are not going to worry about the next few months? Is there no danger lurking on the trading floor?

As a counterargument to the statistics above, we do see one reason to be more cautious now. If we take a look at our renowned trend-tracking graph for the MSCI ACWI index, this does display a falling trend. At the end of April, the index was below the 12-month moving average. In other words, a textbook example of a falling trend.

A clear signal to be careful. We are not trying to say here that all investors should throw out all their shares. But rather: it really cannot hurt to retain a somewhat higher cash position or to act a bit more defensively when building your portfolio.

Graph 3 : Monthly graph of MSCI All Countries World Index (USD, total return index)

Source: Bloomberg

What can we conclude?

‘Sell in May and go away’ is really just a popular saying and not a well-proven investment strategy. It is true that the period from May to October, from a historical perspective, is a weak period, but in two years out of three it nevertheless delivers a positive return.

On the other hand, the current falling trend on a number of stock markets appears to demand a rather more defensive investment policy.

Geert Van Herck
Chief Strategist KEYPRIVATE

This article does not contain any investment advice or recommendation, nor a financial analysis. Nothing in this article may be construed as information with a contractual value of any sort whatsoever. This article is intended for information only and does not constitute in any way a commercialization of financial products. Keytrade Bank cannot be held liable for any decision made based on the information contained in this article, nor for its use by third parties. Every investment entails risks such as a possible loss of capital. Before investing in financial instruments, please inform yourself properly and read carefully the document "Overview of the principal characteristics and risks of financial instruments" that you can find in the Document centre.


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