Have you heard the term “Sell in May and Go Away“? Wall Street is home to many investing strategies and beliefs. Some are better than others. Today, we will look at a few that depend on the time of the year. Generally, some stocks are believed to perform better or worse during certain months or seasons. Awareness of certain beliefs is useful for any investor but shouldn’t be followed by the letter. Many factors can influence trends. Let’s begin our analysis of different historical seasonal stock beliefs and trends.
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May is just around the corner. Temperatures rise, and many pack their bags for a summer trip. What does this mean for the stock market? Sell in May and go away?
The end of spring until the beginning of fall months are usually quieter. They are called the ‘’summery” months.
Many investors are on holiday. Trading volume decreases, and stock markets generally underperform the other half of the year, the ‘’wintery” months. Many investors liquidate part of their holdings when volume decreases in May.
Sell in May and Go Away History
Between 1950 and 2013, the DJIA‘s returns between May and October averaged only 0.3%. However, between 2013 and 2021, average returns reached over 5%.
Massive bull runs happened in 2013 (10%), 2017 (8%) and 2020 (11%). These numbers are certainly much higher than the average.
The belief that summer months aren’t as exciting for investors might be on the verge of disappearing.
More and more people have access to the necessary technology and internet connection while on holiday to remain active in the stock market. In any case, the May to October period yielded positive returns 66% of the time since 1928. Little returns are better than no returns.
Markets change every year, and now more than ever. The amount of investors worldwide increases daily. New trends are created every year, bringing investors back to action. There aren’t any more valid reasons to log out from the stock market.
With the summery months approaching, let’s see what the stock market has in store. Take it one week at a time during that period to see where the market is heading and adjust your strategy accordingly.
November – April
Next, let’s take a look at the best months to invest. Historically, the winter months outperformed the summer months. In fact, between 1950 and 2013, average returns from November to April were 7.5%. Much more money is injected into the stock market during colder months.
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Why November to April?
There are many reasons why the stock market performs better during this period. US midterms are at the beginning of November. Depending on the news, this can send the stock market up or down. Thanksgiving, Black Friday, and the holiday season are usually spending times. Big tech companies, e-commerce platforms, and many other businesses post record sales every year.
Why does everyone have more money towards the end of the year? Holiday bonuses, commissions, or gifts usually come before the winter holidays, and the money gets reinvested into the economy.
Before the end of the year, we usually see a drop in stock prices. Why? Since the markets are closed for more than a weekend, investors sell portions of their holdings to avoid possible bad news.
Also, selling bad investments for capital losses and to offset capital gains. Finally, it’s the holidays, and people want to enjoy their time with their family and loved ones. Stocks don’t always plummet before the holidays, but it’s often a possibility.
The rest of the cold months often see nice stock market gains. There isn’t much traveling or holidays during that period. Volume in the markets increases, and year-end earnings are released. Other factors can swing the stock market up or down, but historically, November to April are good months to realize some gains.
January Effect
In the last segment, I purposefully ignored the well-known January Effect. The first few days of each year are crucial for the remainder.
A quick recovery from dumping stock for tax reasons or a holiday break is often anticipated in the first days of January. If investors decide to stay away from the stock market during that period, it may not be a very fruitful year for stocks. Every year, investors are eager to determine whether the January effect is real.
For other investors, January is a reset button, a psychological reason to return to the market. New year, new gains. Unfortunately, many seasoned investors are ready to set their traps for this trend, making it unprofitable for some. It is just another market timing strategy.
What Do the Numbers Say?
Let’s talk numbers. We will use the S&P as a benchmark. Since 1950, January ended on a positive note 43 times and 29 negatively. The average return was 0.94%. However, since 2020, it split even at 11 with an average return of -0.36%. January is either good or bad. There haven’t been any months with a return of around 0%.
What happens when we compare the December selloff to the January Effect?
Between 1950 and 2021, there were 54 positive and only 18 negative Januarys. The average return is 1.42%. However, since 2000, there have been 16 positives and six negatives. The average is still positive at 0.68%.
Historically, it seems that December has been more profitable and more predictable than January. Who would’ve thought? The January Effect remains a theory. Don’t fall into this trap.
Sell in May and Go Away Cycles
We conclude our analysis of seasonal stock market trends with presidential cycles. How does a Democratic or a Republican president affect the market? Do we sell in May and go away?
Does the term or the year have anything to do with bullish or bearish cycles? Let’s take a look.
Stock market researcher Yale Hirsch published a book called Stock Trader’s Almanac in 1967. Updated versions are published periodically. The book explains popular market timing strategies, such as the ones explored above. Hirsch’s theories also include presidential cycles.
When presidents first get elected, they help the people that put them in power. Halfway through the mandate, the president does what is best for the economy.
Stock markets theoretically get a boost. Charles Schwab analyzed this theory in 2016. The returns below are from 1950 to 2016 based on the S&P benchmark. The average S&P return since 1950 is 7.68%.
Year 1: +6.5%
Year 2: +7%
A Big Year in Year 3: +16.4%
Year 4: +6.6%
We can see that Hirsch’s theory holds. During Trump’s presidency, the numbers also held. However, the first and third years saw double-digit gains, with the third reaching 28.9%. We are in Biden’s second year of presidency; let’s see if it yields results similar to the first.
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Democrats vs Republicans
Presidents enact more tax legislation during the first two years of the presidency. This causes more stock market uncertainty. During the last two years, there have been far fewer changes, and markets have performed much better.
In this final section of Sell in May and Go Away, let’s look at which party is in power and yearly stock market returns. Since 1946, democrats held the White House 47% of the time, while Republicans had it 53% of the time.
However, US politics aren’t that simple. It is also a matter of who controls the House and the Senate. The graph below sums up annual returns based on which party is in control.
Every president and their team is different. Recently, there has been a lot of division between both parties, affecting the country. Once again, these are trends. Their success depends on many factors. A pandemic and a war aren’t yearly events. They create much uncertainty, which isn’t good for the stock market. Trends can easily be reversed.
Final Thoughts: Sell in May and Go Away
To conclude, sell in May and go away, November to April bull runs, the January effect and presidential cycles are historical trends. Investors and researchers found that these patterns may work when there isn’t a pandemic or war.
Since the turn of the century, life around us greatly changed. It becomes more difficult to compare today’s stock market to the 1980s. Information and connectivity are much easier to access. For those much more active in the stock market, staying informed about every detail to maximize performance becomes essential.
If you want to learn more about how to profit from the stock market, head over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.
