Sell in May...or Hold Tight!

One of the most consistent calendar effects in equity markets is the tendency for equity values to perform better in the six months between November and April than in the six months beginning May and ending October.  This is apparently a seasonal phenomenon arising from the practice of going on vacation in the summer months in the Northern Hemisphere.  With investors lolling on the beach in July and August volumes decline and prices languish.  The calendar effect has given rise to the financial market maxim, “Sell in May and go away.”

The coronavirus pandemic may put a hitch in investor annual stock sell off.  It may be difficult to take profits in May if there are none.  When it became evident in early February 2020, that the U.S. and Europe would be next to experience a spread of the coronavirus, there was a dramatic rout in U.S. equities.  Prices have only partially recovered to prices levels not seen since mid-2019.  Some have made the case of overvaluation in the U.S. equity market prior at the 3,400 level where the S&P 500 Index of large company stocks had peaked in January 2020.  That question may be moot for those shareholders who are now trying to decide whether to close out long positions and simply ‘go away.’

Before dismissing the idea this year, it might be helpful to look at how this calendar strategy has worked in recent years.    Using the Dow Jones Industrial Average as a proxy for the U.S. equity market suggests that at least as far as large companies are concerned the Sell in May calendar effect may very well help shelter investors from significant losses during the summer months of recession years.  However, during bullish times it appears that investors simply get left out if stocks are sold in May.  By most accounts U.S. investors are facing a recession in 2020, making the Sell in May strategy worth considering.

Dow Jones Industrial Average Returns
Year	May 1 – Oct 31	Nov 1 – Apr 30	Total		Sell in May
2008	-27.3%	-12.4%	-37.7%		-12.4%
2009	18.9%	13.3%	32.2%		13.3%
2010	1.0%	15.2%	16.2%		15.2%
2011	-6.7%	10.5%	3.2%		10.5%
2012	-0.9%	13.3%	12.2%		13.3%
2013	4.8%	6.7%	11.5%		6.7%
2014	4.9%	2.6%	7.5%		2.6%
2015	-1.0%	0.6%	-0.4%		0.6%
2016	2.9%	10.6%	13.5%		10.6%
2017	10.0%	3.2%	13.2%		3.2%
2018	4.1%	4.6%	8.7%		4.6%
2019	3.9%	-14.7%	-10.8%		-14.7%

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.