BMO Capital updates the equity seasonal patterns with the typical sell side sugar coating to reduce your stress during the next several months:
“Sell in May and go away” has been a Wall St. adage for decades. Tradition holds that investors sell their stocks in May and stay away from the market until the end of October to improve returns. Indeed, historical performance patterns appear to support this. As Exhibit 1 shows, April 30 thru October 31 is traditionally the weakest six-month period for S&P 500 performance by a wide margin, while October 31 thru April 30 is the strongest.
A closer inspection of this seasonal period reveals a more complicated backdrop. For instance, analyzing all years since 1950, we found that nearly two-thirds of the time returns were positive for the April 30 thru October 31 period (Exhibit 2, left chart) with an average return of 6.9% for the S&P 500. By contrast, negative years proved to be brutal with the S&P 500 averaging an 8% loss.
However, we find it interesting that 10%+ gains are more common than the 10%+ losses some investors like to associate with this period. In addition, “Sell in May” has not worked out all that well in the current bull market – four out of the six years yielded positive returns and for the two years where returns were negative the market was dealing with geopolitical shocks (Exhibit 2, right chart).
Objectively:
- This is a probability game and the average return April to October is generally below what short-term debt instruments offer. The probability-weighted return for this period is +1.3% with 38% chances of losses, a huge contrast with the other half-year.
- An even closer inspection reveals more disturbing trends. Since 1980, twenty-four of the 35 years were positive during the May-Oct. period but in ten of these positive years, equities actually dropped 5% or more within the May-Oct. time frame before recovering. In effect, in 21 of the 35 years (60% chance of losses) since 1980, equities went trough a rough patch.
- I found no relationship with either trends in inflation, interest rates or valuation to explain the weakest May-Oct periods. This means that essentially anything can happen during that period.
It may be that investors are trigger happy after their Nov-May gains and, seeking a stressless summer, trim their equity holdings in the spring and are prompt to react to any negative event, including geopolitical shocks. BTW, the 7.1% gain in 2014 occurred thanks to a 8.2% jump in the last 2 weeks of October, after equities had sank nearly 10% between mid-September and mid-October…Had we stopped the clock October 15, only 3 of the 6 years of the current bull market would have been positive, one being a low +1.0%…