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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2017 has gotten off to a strong start for stocks. The S&P 500 has gained 6% on a total-return basis year-to-date. Corporate earnings are expected to increase for the third straight quarter—S&P Capital IQ consensus earnings forecasts a more than 9% year-over-year increase in S&P 500 operating results, potentially reaching a record 12-month high of $120.30 per share. And volatility—as measured by the CBOE Volatility Index (VIX)—remains historically low (see VIX chart, below).

But risks remain:

  • Valuations, broadly speaking, may be rich. The S&P 500 Index has a price/earnings ratio of about 18.2x (as of April 6, 2017), based on expected earnings in 2017, which is more than 10% above its 15-year average of 16.5x.
  • Volatility could resurface. Possible triggers might include slower-than-expected growth in emerging markets (specifically, China); delays or unexpected developments in government trade, tax, and fiscal policies; and of course, rising geopolitical risks in many markets around the world.
  • Policy uncertainty lingers. Health care, tax, and infrastructure spending proposals from the new administration may have helped fuel the rally in stocks post-election, however, much uncertainty remains if these policies will make it through the legislative process.

With all this in mind as the calendar keeps turning, should you “sell in May and go away,” as the oft-cited market adage suggests? Not necessarily, according to historical data.

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. The same can be said for active investors, for whom there may be more appealing strategies—with sector rotation among those to consider.

May is not so bad

When it comes to performance by month of the year, May ranks among the bottom half for stocks (historically, September has the distinction of being the worst month of the year). However, May has produced positive returns more often than not.

From 1928 through 2016, the S&P 500 Index has generated positive returns 50 times in May, negative returns 39 times, and the variation in returns has been dramatic (see the table below).

Stocks have recorded positive gains more often than not during May.

May statistics
Mean return (%) 0.0%
Median return (%) 0.6
Maximum return (%) 23.1
Minimum return (%) −23.9
Standard deviation (%) 6.0
Positive times 50
Negative times 39
Source: FactSet, as of March 30, 2017. Stock price returns are represented by the S&P 500.

For the active investor with a short-term outlook, May’s average return of 0% does not suggest that mechanically selling in May is optimal. Of course, averages don’t tell the whole story, as returns have varied widely; the largest drop was 23% in 1932, and the biggest bounce was 23% in 1933. However, on the whole, May is a relatively positive to mixed bag in terms of returns, and so selling does not seem prudent from a historical perspective.

A sector strategy instead of selling

Looking beyond May, investors with a relatively longer investment horizon may find it interesting to know that stocks have historically tended to underperform over the ensuing five months after May, compared with the prior, so-called best six months.

Since 1928, the S&P 500 Index has gained, on average, roughly 5% from November through April, while adding just 2.0% from May through October. However, annual returns have varied widely within these two periods. Moreover, history shows that for investors who are actively trading over short time frames, there may be better strategies than simply selling in May and buying back in November.

Sam Stovall, equity analyst with S&P Capital IQ, says their analysis of five different strategies finds the best has historically been a sector rotation strategy (see chart and table below). “Analyzing five strategies over the past 25 years that incorporated staying invested, cash, bonds, smart beta (e.g., low volatility), and S&P 500 sectors, the strategy of rotating into two defensive sectors—consumer staples and health care—has offered the highest returns with below-market volatility.”

The five strategies to consider are:

  • Stay invested—Holding the S&P 500 Index from May to November.
  • Cash—Going to cash on May 1 and earning the three-month T-bill return until October 31.
  • Bonds—Earning the Barclays Aggregate Bond Index return beginning May 1 and ending on October 31.
  • Low-volatility stocks—Earning the S&P 500 Low Volatility Index return beginning May 1 and ending on October 31.
  • Sectors—Purchasing a portfolio of 50% consumer staples and 50% health care on May 1 and selling on October 31.

Since December 1990, the strategy of going to cash offered lower standard deviation (e.g., lower volatility) and a lower maximum drawdown (e.g., worst annual return), compared with staying invested in the S&P, but it has produced the lowest compound annual growth rate (CAGRs) of all the five strategies compared. Thus, longer-term investors should not hurry to sell their positions in May.

For the active investor, rotating into bonds or a low-volatility index from May to November has produced higher CAGRs and frequencies of outperformance (with higher volatility) compared with going to cash. It is the portfolio of 50% consumer staples and 50% health care that produces the highest CAGR of the five, and it actually had lower volatility (14) compared with the low-volatility strategy (15), as well as staying invested in the broad stock market (18).

Given that past performance is no guarantee of future results, this does not mean active investors should sell their positions come May and rotate into these two sectors. Even if you were to consider a sector rotation strategy, there are many other factors to consider, one of which is analyzing the sectors of the market that may be best positioned for current market conditions. 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.

Investing implications

All these strategies are among the many choices you have, and 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. Additionally, if you are reassessing your portfolio, it may be beneficial to consider positioning your portfolio for potential changes in the phase of the business cycle, evolving economic conditions, and market-moving news, rather than a singular calendar anomaly.

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.

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Past performance is no guarantee of future results.
1. FactSet, as of March 30, 2017.
2. Stock Trader’s Almanac.
Views and opinions expressed may not reflect those of Fidelity Investments. These comments should not be viewed as a recommendation for or against any particular security or trading strategy. Views and opinions are subject to change at any time based on market or other conditions.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Sector funds can be more volatile because of their narrow concentration in a specific industry.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. The S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. S&P 500 is a registered service mark of Standard & Poor’s Financial Services LLC. Sectors and industries are defined by the Global Industry Classification Standard (GICS).
The Barclays Aggregate Bond Index is a market value–weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and nonconvertible investment-grade debt issues with at least $250 million par amount outstanding and with at least one year to final maturity.
The S&P 500 Low Volatility Index represents a low-volatility strategy that consists of the 100 stocks in the S&P 500® Index with the lowest trailing 12-month standard deviation.
The S&P 500 sector indexes include the standard GICS sectors that make up the S&P 500 Index. The market capitalization of all S&P 500 sector indexes together composes the market capitalization of the parent S&P 500 Index; each member of the S&P 500 Index is assigned to one (and only one) sector.
Technical analysis focuses on market action—specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments, you must make your own determination whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.
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