Sell in May and Go Away- Should You Really Take a Summer Break from the Markets?
Is the age old adage true? Should you really pause investing during the summer?
The first thing I want to answer with the statement “Sell in May and Go Away” is if there is any actual truth behind the statement.
According to Yale Hirsch’s Stock Trader’s Almanac, the Dow Jones Industrial Average (DJIA) has returned ~7% from November to April, and just ~2% from May to October. They went back to as far as 1950 for this statistic.
The S&P 500 shows a similar trend, where average returns from May to October are significantly lower than November through April.
Interestingly this isn’t only a Canada / US phenomenon but is also observed in Europe, Asia, and emerging markets.
Apparently the saying is often looked at from the other side and is called the Halloween Effect. Which I can surmise is more of a lead up to the Santa Claus Rally but that’s just my opinion.
Other speculative reasons behind why this occurs include Lower trading volumes in summer due institutional investors taking vacations, fewer earnings announcements and market-moving news during Q3.
Some of these have complimentary reasons like reallocation to risk off when there is lower volume and investor sentiment turning more cautious for the same reasons.
Research & Academic Support
A 2002 study by Sven Bouman and Ben Jacobsen, titled “The Halloween Indicator, ‘Sell in May and Go Away’: Another Puzzle”, examined 37 international stock markets.
Found that 36 out of 37 markets performed significantly better from November to April than May to October.
The effect was not explained by risk, volatility, or macroeconomic variables, making it a persistent seasonal anomaly.
In a recent article on Nasdaq.com it was noted that April this year unlike previous years was somewhat unfavorable to investors. Whereas May has been very favorable with “the Dow, the S&P 500 and the Nasdaq Composite — were up 3.9%, 6.2% and 9.6%, respectively, in May”
So should you really take a summer break?
Historically, yes, markets have underperformed in summer months. However, in my mind even if you only gain 1-2% over the summer if you were to wait until September / October you would be out that percentage plus any dividends.
Personally I do not take a break. I prefer to dollar cost average throughout the entire year. I do larger buys four times a year with the largest being end of March and others being end of June, September and December.
While the trend is statistically significant timing the market is always difficult and in recent years the summer has been pretty strong outside of 2022.
Summary
While selling in May and going away may mathematically make the most sense I prefer to stay the course. One thing I didn’t mention above is that if you hold off investing during the summer you may be more inclined to spend instead. Or in other words “don’t let summer spending wreck your investment contributions”
That’s all folks thanks for reading!
You can support me by:
- Subscribing to my YouTube Channel
- Using my WealthSimple referral link
- Simply continuing to read my weekly posts here.
Cheers ☕