There is nothing like a seasonal pattern to rankle analysts, unsettle investors and get behavioural finance experts foaming at the mouth. Investors have various levels of expectation about the influence that events such as Santa rallies, presidential election years and tax calendar effects may have on stocks, and at least some of it appears to be warranted. Indeed, the mere anticipation of these occasions is claimed by some to be self-fulfilling; if investors expect stocks to fall then that confidence often means they will, come what may.
But what about the big one? Given that the phrase “Sell in May and go away; don’t come back till St Leger’s Day” is probably the best known of the seasonal trading strategies and that another strong rally through the winter months has started to tail off, we thought it wise to investigate whether investors should pay it any heed. Certainly getting out in May last year, shortly before the market crashed, could have saved investors a tidy sum. So what are the odds for this year, and should you get out early?
Why anyone cares about selling in May
Seasonal patterns have an almost magnetic attraction for academics, which means there is no shortage of research on the subject. In 2002 Ben Jacobsen and Cherry Zhang produced a paper that found the Sell in May strategy beat the market more than 80% of the time over five-year horizons and more than 90% of the time for ten-year horizons.
That said, professional money managers and analysts tend to be more sceptical. Last year, Evolution Securities (now Investec) and F&C Investments put out separate research debunking wide seasonal variations in market performance. Meanwhile, a detailed assessment by Fidelity’s Tom Stevenson was slightly warmer to the idea, with his 20-years figures generally showing better returns from investing through the winter. Importantly, Stevenson stressed that the transaction costs of a Sell in May strategy could wipe out any potential gain and he concluded that staying fully invested still looked like “a sensible, and much less stressful, approach”.
So, the professionals think that a Sell in May strategy is generally the wrong course of action and, to be fair, a quick look at recent history offers a mixed picture. If you had sold in May 2009, for instance, you would have missed a major run by the FTSE…
