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Sell in May and Go Away

Sell in May and Go Away

Andre Thomas

Sell in May and Go Away

“Sell in May and Go Away” as a saying has evolved throughout history and become well known amongst the investment community. The theory suggests that market seasonality exists and can be utilised to your advantage to catapult your returns relative to the index.

To explore this further and what it means for you, let’s dig deeper.

What Does this Saying Mean?

Historically, it has been found that the share market does have a seasonal dynamic and element in its performance. We tend to observe markets rise from December through to May and decline from May through to August.

As indicated above, markets have historically on average proven this phenomenon true. We stress that this trend has persisted on average.

Let’s dive into some more numbers.

Below we see two more charts that illustrate the historical merits of this idiom.

Source: Bauman and Jacobsen

On the top we can see the underperformance of each month on average for the past 20 years of the S&P 500 index.

Similarly, on the bottom we can observe the highlights of a seasonality study completed by Bauman and Jacobsen in 2001. The study involved looking at stock market performance by season in 37 countries. The conclusion of the study found that in 36 of 37 countries the winter months (in the northern hemisphere) return at a rate materially higher than summer months.


So, that begs the next questions, what causes this? Do investors celebrate Christmas and New Year holidays with elevated market performance? Perhaps that plays a part, but let’s have a look some alternative explanations. It is key to note that there is not one universally accepted cause of market seasonality.

a) Tax loss selling

Recent discourse on the topic has seen the rise of a credible and very rational explanation for this trend. Globally, the months of May through to September represent tax reporting periods for individuals. By selling shares that are currently trading at a loss, investors are able to secure tax losses as an offset to capital gains. Hence, globally investors have a strong incentive to sell portions of their portfolios at a loss and lock in their tax benefits. The theory underpinning this cause is that these sell offs flood the market with increased supply of stocks and depress prices.

b) Market participant volumes – A Northern Hemisphere Perspective

Many investors subscribe to the idea that the underperforming period can be attributed to the number of market participants. The months of May to August are typically characterised by warmer weather in the northern hemisphere, encouraging vacation and holidays. Summer often represents a much more social season in the northern hemisphere, compounding the rationale that a portion of investors in the winter months are essentially not participants or participants at a much lower volume then the summer months.

The warmer weather is effectively through to decrease the volume of trading that is undertaken and in turn reduce the ability of the market to outperform the winter period.

c) Crop Cycles – A Historical Perspective

Interestingly, the trend has been thought to have originated in the UK as a result of crop harvests. To buy summer crops, merchants would have to sell their shares and in turn depress prices in the summer months. When crops harvested, they sold these products and rebought their shares, fuelling the market rally during the winter (for the northern hemisphere) performing months.

There are some sources that suggest this trend can be recognised all the way back to the 17th century!

What Does this Mean for Investors?

Should this historic trend affect the way you view current markets? The view does suggest that there may be some correction risk potential moving into the future. With the US market reaching all-time highs and the ASX once again breaking the 7000 mark, subscribing to this thesis could lead to an expectation of a bit of weakness in the short term.

However, a key consideration to recognise here, is that the market will not necessarily decline within the underperforming period. It will instead do just that, underperform relative to the stronger period.

The underperforming period will still on average hold positive returns, however, does not perform to the same extent of the alternative period. Hence, if you did opt to follow this strategy, it is likely that you would miss out on capturing the growth that the market experiences in these months.

To display this point, let’s consider the last 5 years.

For the ASX index, this strategy has yielded mixed results over the last 5 years. In 2016 and 2018 the strategy would have saved you a loss on the index of 2.07% and 4.2%. In the years 2017, 2019 and 2020 by completely liquidating your position you would have missed out on 1.7%, 6.3% and 27% (COVID rise) upside in the respective periods.

There are two important pieces of information that this blog will wrap up with in consideration of this strategy. The first, that past performance and history is certainly not a determinant of the future. Secondly, that the current macroeconomic and health conditions are unprecedented, and the future is evolving rapidly.

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