Does Sell in May and Go Away for the Summer Actually Work?

By Floyd Saunders, The Author of Five Paths To Wealth, Family Financial Freedom and Figuring Out Wall Street.

There are some investors that follow the seasonal pattern of “Sell in May and Go Away”. They simply sell their active stock positions right before the summer vacations start, pocket the money in U.S. Treasuries bonds and return to trading in late September or October.

The idea behind this old saying is the stock market performs at below-average results in the six months from May Day through the end of October (the “summer” months) and is an above-average performer the other half of the year (the “winter” months). By placing their money in U.S. Treasuries bonds they are reducing the risk of possible loses in the summer months and then they get back into stocks when returns are better. If this idea was true, then you would be wise to sell out of your stock positions, take the summer months off and buy back in after October.

Statistically, there is some truth to the trade from a historical perspective. The six-month stretch from May through October has been statistically the worst six-month stretch for stocks since 1957.

However, the S&P 500’s performance during those six months is far from bad. The index has averaged a 1.5% gain overall during that stretch and has traded higher 64.3% of the time.

If you sold everything on the first day of May and bought back into stocks on the first of September over the last ten years, it would have cost you money in nine of the last ten years.

The biggest miss was in 2020, when the S&P 500 gained around 20% in the summer months as stocks recovered quickly from the “Covid correction”.

"Sell in May and go away" was presumably based on the belief that when traders had to be physically present to ply their trade, summer vacations got in the way of market progress. Of course, trading is now possible from anywhere, even for the pros, so that idea doesn’t really work anymore.

If you are holding stocks in an ETF and following an index like the S&P 500, you are likely to see some decline in the value of your holdings during the summer, but getting the timing right as to when to jump in and out of the stock market is still very difficult to pull off. You are almost always better off staying in the market, dollar cost averaging purchases and taking a long-term perspective of your returns with stocks or most other financial products.

Clearly, rather than "selling in May and going away," investors would be better advised to ignore this idea of seasonally selling. It is really hard to believe that this year will be an exception for a couple of reasons, but it might be.

Research on Seasonal Trading Patterns

There is some research that indicates this pattern plays out only in the periods after midterm elections (like this year, 2022). In the other three years of a presidential term, there is no average difference in the returns during summers and winters.

A report by Kam Fong Chan and Terry Marsh, entitled “Asset Prices, Midterm Elections, and Political Uncertainty,” published in the Journal of Financial Economics, found that, between 1871 and 2015, annual U.S. stock-market returns were 15.41 percentage points higher in the winter months following midterms than during all other months.

Successfully timing swings in the stock market is always difficult. But you might stand a bit of chance in 2022.

There are a few historical patterns in the stock market that might be better at predicting a bit of a stock market rally later this year.

Midterm Elections and Seasonal Trading

First, we can look at the midterm elections in the U.S. The U.S. stock market tends to rally after midterm elections because investors get a bit of direction about what direction government spending will go.

Regardless of the reason, a strong rally gain would be welcome this year, given the stock market’s recent weakness this winter and spring.

The S&P 500 currently is 11% off its early January all-time high.

The Russell 2000 index, a widely used indicator for small- and mid-cap stocks, is off 20% from its earlier highs.

Midterms in Times of War

Second, we can look at what happens in years with a midterm election and a war occurring. Every midterm year is unique and this year promises to be no exception. The stock market’s average return in years with both a midterm election and war happening was “remarkably consistent” with the pattern that found in other midterm years, according to the study by Chan and Marsh.

The Ukrainian conflict isn’t a reason to expect a different result post-midterm this year.

Midterms During Rate-Hike Cycles

Third, we can look at midterm elections during a cycle of interest rate hikes by the Federal Reserve. This midterm election year is also occurring with the Federal Reserve’s rate-hike cycle, which appears destined to last well through the end of this year and into 2023.

Chan and Marsh researched this question, there have been few midterm election years that occurred during rate-hike cycles. But their study found interest rates experienced a “reasonably persistent decline” after the elections. It would therefore be reasonable conclusion that a rally in stocks will occur after this year’s midterm election.

(Image: NY Times)

What’s the bottom line?

If this were a “normal” year, the next 12 months would be the only time between now and 2025 in which you should bet on the idea that stocks perform better in the winter months, that is suggested by the “Sell in May and Go Away Until September” Indicator.

If you are tempted to move to the sidelines now and jump back in after a possible post-midterm rally, then wait until after the election results are in before placing your trades. The morning of Nov. 9, the day after Election Day is likely to see a bit of rally in stocks. But if the results are so close that control of the House or the Senate isn’t yet certain, wait until it is.