Should you "sell in May and go away"?

Probably not. But there are some interesting calendar trends and strategies to consider.

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Should you "sell in May and go away," as the oft-cited market adage suggests? Probably not, according to historical data, as there may be better options if you are an active investor. If you are a long-term investor, there are more important factors that should influence your investment decisions—including your individual investing objectives, risk constraints, and tax circumstances.

Here's how you might think about "sell in May" in today's market.

What is "sell in May"?

This stock market adage was born from what the Stock Trader's Almanac calls the "best 6 months of the year." Historical data reveals that the top performing 6-month rolling period, on average, has been November through April. Hence, the saying investors should "sell in May and go away"—and come back in November.

Since 1945, the S&P 500 has gained a cumulative 6-month average of 1.4% from May through October on a price return basis. That compares with a 6.7% average gain from November through April. Additionally, the S&P 500 has generated positive returns 64% of the time from May through October, and 77% of the time from November through April. This outperformance is seen not just in large-cap stocks (as measured by the S&P 500), but also small-cap stocks (as measured by the S&P SmallCap 600) and global stocks (as measured by the S&P Global 1200).

Of course, it should be obvious that there are many caveats to this calendar-based trading pattern. For instance, returns have varied widely, not only between the November through April and May through October periods, but also within these time frames.

Moreover, "sell in May" doesn’t account for the uniqueness of each period: the economic, business cycle, and market environment that differentiates now from the past. Rigidly following this trading pattern today without considering the potential impact of ongoing trade disputes—particularly between the US and China—as well as the ever-evolving earnings outlook and your unique investing goals and risk constraints is not a wise strategy.

Consequently, it's better to think of this market adage not as hard rule, but rather a trend that might lead to some interesting insights.

Rotate rather than retreat

According to analysis by CFRA, sector rotation may be a more appropriate takeaway from the sell in May calendar trend, especially for active investors. Rather than exit the market, you could factor in seasonal patterns that have developed in recent years to your decision-making process.

Since 1990,* there has been a clear divergence in performance among sectors between the 2 time frames—with cyclical sectors easily outpacing defensive sectors during the "best 6 months." Consumer discretionary, industrials, materials, and technology sectors have notably outperformed the rest of the market from November through April.

Alternatively, defensive sectors have outpaced the market from May through October over the past 29 years. For example, the health care and consumer staples sectors have recorded an average increase of 4.9% and 4.4%, respectively. That compares with a 1.8% gain for the S&P 500.

CFRA looked at a hypothetical portfolio consisting of an equal weighting of consumer staples and health care sectors from May through October, and then rotated into an equal exposure of consumer discretionary, industrials, materials, and tech sectors from November through April. They found an increase in compound annual growth rates (CAGRs) and a reduction in annual volatility across large caps, small caps, and global stocks for this strategy versus respective benchmarks (see CFRA-Stovall Seasonal Rotation Custom Indices table). Note that these values do not include the impact of transaction costs, fees, or taxes.

As the table illustrates, the cap-weighted semiannual seasonal rotation strategy produced a 13.7% CAGR since April 1990, compared with a 7.8% CAGR for the S&P 500. The standard deviation of returns was 15.6 for the seasonal rotation strategy, versus 16.6 for the S&P 500. Of course, as is the case with the "sell in May and go away" trading pattern, caveats to this strategy also exist. Returns have varied both across and within each period, and this seasonal investing approach may not be suitable in the context of a larger portfolio strategy.

Investing implications

The seasonal aspect of "sell in May" has received some additional attention this year in the wake of the "best 6 months" period. Trade disputes, the Fed indicating that rate cuts do not appear on the horizon, and some softer earnings results have pushed stocks off their April highs by roughly 4%. That follows a 5% rally for stocks from November 1, 2018 to April 30, 2019.

With that said, and given that past performance is no guarantee of future results, this does not mean active investors should sell their positions at some point this month and rotate their portfolio into the 2 defensive sectors outlined above. Even if you were to consider a sector rotation strategy, there are many other factors to consider, including the risk of sector concentration implied by a defensive rotation strategy. As always, you should evaluate each investment opportunity on its own merit and with an eye toward how it may perform in the future, rather than solely focusing on how it has performed in the past. Any decision you make should be made within the context of your specific investing strategy.

For instance, if you do have positive gains and want to lock in some of those profits, you could consider a "sell in May and potentially stay" strategy. In other words, consider selling only those positions in May that you don’t want to be in for the long haul, and stick with your strategy for the rest of your portfolio.

It's also worth acknowledging that these types of strategies may only be suitable for active investors with shorter investment horizons, and even active investors need to consider their trading strategies within the context of a diversified portfolio that reflects their time horizon, risk tolerance, and financial situation.

Next steps to consider

Find new investing ideas and get up-to-the-minute market data.

Learn what you need to know before trading the market.

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