Summer Stock Slump: Fact or Fiction?

Sell in May and go away.  Many of you have heard or read this saying before when it comes to investing.  The idea is based on the premise that the stock market typically does not perform as well over the summer when compared to the rest of the year.  During this time of year, you’ll hear a lot of chatter from the talking heads to sell your stock in May and then buy again in November to avoid the summer slump.  But how wise is this advice anyway?  Is it really better to just sell everything in May and not even look at stocks until November?

In order to answer these questions, I went back and looked at six years worth of data, starting in November of 2010 for the S&P 500.  I assumed you purchased on the first trading day in November and sold on the last trading day in April each year.  Below are the results for the May-October and November-April time periods.

Based on this data, the November-April time period had an average return of 8.46% while the May-October time period had an average return of only 2.00%.  Based on this data, it does appear that the summer months don’t perform as well, so a point for the sell in May crowd.  However, when you dig deeper into the numbers you’ll see that only once in the past six years did the summer months have a negative return.  The other five years all had a positive return, with the summer of 2013 having a 10.27% return.  So if you would have sold in May you would be missing out on those additional returns.  Looks like we’re going to have to take that point back now.

The case against selling in May gets stronger when you look at the returns of holding the S&P 500 all year.

If you just purchased the S&P 500 on the first trading day in November and simply held it, you would have averaged a 11.38% return, which is higher than the 8.46% you would have received by selling in May and avoiding the weaker, although still positive, summer months.  In addition, by selling in May and buying again in November, you would incur commission fees twice a year, which would further eat into our profits.

So is the “Sell in May” adage really true? It is true that May-October typically does not perform as well as November-April, but on average the Summer months still provide positive returns.  Instead of selling everything in early summer, use this knowledge of seasonality in the market to your advantage.  While the boarder market tends to be more consistent, individual stocks can have some pretty rapid price changes.  If you own a stock that has significant gains, maybe reduce your risk and unload some shares going into the weaker summer months and then use those proceeds to buy stocks at more attractive prices in preparation for the stronger winter time period.