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Investment Insights: Should You “Sell in May and Go Away”?

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Investment Insights: Should You “Sell in May and Go Away”? RESEARCH Investment Insights: Should you “Sell in May and Go Away”? The “Sell in May” effect is the tendency over recent years for US equity markets to perform poorly during the summer months (defined as May-October) relative to the winter months (November-April). In this article, we take a closer look at the Sell in May effect to understand whether investors should incorporate this particular market timing strategy when making investment decisions. Every May, articles are published in the popular press on The stark under-performance of May-October months the dreaded Sell in May effect, warning of lower equity when compared to November-April months raises the returns over the next few months. In academic research following questions: (i) Does Sell in May have practical on this topic, Bouman and Jacobsen (2002) findsummer relevance for an investor? (ii) Can an investor use Sell in equity returns for most major international markets are May to gain an edge in competitive markets? To answer lower than winter returns. A related paper by Kamstra, these questions, we examine the following: Kramer and Levi (2003) provides an explanation for this • Which individual months have the worst returns? Are effect. In their explanation, they link risk aversion levels they likely to occur over the summer? with the amount of sunlight using a psychological condition • Can a 4% difference between summer and winter months called seasonal affective disorder. The day of the year with arise by chance? the most sunlight for countries in the Northern Hemisphere • How is the performance in an earlier period? Do we still is June 21 (See Exhibit 1). As sunlight is reduced over the see a “Sell in May” effect? summer and fall, the authors explain, investors become less willing to take on risk. This increase in risk aversion Summertime, Wars and Financial Crises drives investors to sell out of the market during the Exhibit 3 displays the 10 worst months for equity returns summer, pushing prices lower. When the days start getting for the period November 1926-October 2013. The orange longer again, risk aversion decreases and investors return highlighted rows are summer months and the blue rows to equity markets. are winter months. 6 out of 10 worst return months for the US market occurred during the great Depression. 8 out of Exhibit 2 reports monthly average and six-month trailing 10 worst return months occurred during the months of returns by calendar month over the period November May through October. Many of the explanations for the 1926-October 2013 using US Market CRSP 1-10 index returns. poor monthly returns are related to (i) the outbreak of a Similar to prior academic literature, summer months are major war conflict or (ii) a financial crisis. For example, defined as May, June, July, August, September, October, and in March 1938 Germany annexed Austria and in May winter months are November, December, January, February, 1940 Germany invaded France. Are armed conflicts more March and April. September is the worst performing month, likely to begin in the summer? The most recent conflict -0.71%, and the only month with a negative average return. involving the US is the invasion of Iraq, which started in October returns (0.36%) are also quite low. The returns March 2003. are highest in December (1.79%), January (1.57%), and November (1.48%). Over this relatively long period, summer Major financial crises also tend to occur during the months (May, June, July, August, September and October) summertime, including the Black Thursday stock market buy-and-hold average returns are 4.35% compared to crash of October 1929, the Black Monday portfolio 7.86% for winter months (November, December, January, insurance crisis of October 1987, and the aftermath of February, March and April). In sub-periods reported in the Lehman Brothers bankruptcy during October 2008. columns 2-5, the summer return is only higher than the There is, however, no economic reason why financial winter return in the earliest period (1920-1949). crises should occur at any specific time during the year. Market volume is lower from August to October, but this To illustrate this idea, let’s assume researchers analyzed is still unlikely to cause the large declines that have been early data used in Exhibit 5 for a six-month buy, six-month related to financial crises reported in Exhibit 3. Overall, it sell strategy like Sell in May. This new strategy would yield is unclear if large negative market movements are more a 3.60% return difference by selling equities in February likely to occur during the summertime. and buying back into equities in August (January [6.01%] minus (July [2.41%]). To test how effective this strategy Can Sell in May Arise by Chance? is using out-of-sample data, we could examine this new Exhibit 4 reports average rolling six-month buy-and-hold “Sell in February” strategy using data from 1926-2013. In returns by calendar month over the period November the latter period, the new Sell in February strategy would 1926-October 2013. For example, the square assigned to produce only 0.53% return difference (Exhibit 4: January August corresponds to the average buy-and-hold return [5.89%] less July [5.36%]). over the period March-August. Corresponding to the Sell in May effect, the lowest six-month return period ends in Conclusion October, while the highest six-month return period ends Despite compelling recent evidence, we do not suggest in April. The return difference is 4.35% (April [7.86%] less investors pay attention to seasonality patterns in stock October [3.51%]). Altering the window by one month has a market returns such as the Sell in May effect when meaningful impact on the return of this six-month strategy. making investment decisions. Using out-of-sample Moving out of equities one month earlier, on April 1, evidence, we find a lack of a reliable Sell in May effect. decreases the return difference to 2.02% (March [6.93%] These findings suggest this phenomenon could be driven less September [4.91%]). Similarly, delaying selling out of by data mining and is unlikely to hold going forward. the market by one month decreases the return difference References to 2.11% (May [6.88%]-November [4.77%]). Bouman, Sven, and Ben Jacobsen. “The Halloween Taking advantage of the fragile Sell in May effect requires indicator,” Sell in May and go away”: Another puzzle.” selling out of equities precisely on May 1. What is special American Economic Review (2002): 1618-1635. about May? It is not the start of a calendar quarter. Andrade, Sandro C., Vidhi Chhaochharia, and Michael E. May 1 is also close to two months prior to the June 21st Fuerst. ““Sell in May and Go Away” Just Won’t Go Away.” summer solstice, or the longest day with most amount of Financial Analysts Journal 69.4 (2013): 94-105. sunlight. When interpreting patterns in historical data, it is important to consider the number of experiments that Kamstra, Mark J., Lisa A. Kramer, and Maurice D. Levi. were run that resulted in the final outcome. While the “Winter blues: A SAD stock market cycle.” American total number of tests is hard to estimate, in the case of Economic Review (2003): 324-343. Sell in May researchers could have chosen from 11 other months as a starting month for their analysis. In the next Exhibit 1: Average Amount of Daylight by Calendar Month section, we will try to understand the implications of the January flexibility associated with selecting the starting month December February for a six-month market timing strategy. November March Out-of-Sample Evidence on Sell in May Winter One way to examine whether an interesting pattern is genuine or occurs by chance is to analyze the effect October April Day using out-of-sample evidence. Exhibit 5 displays average Night rolling six-month buy-and-hold returns by calendar Summer September May month from November 1872-October 1926 using data from Robert Shiller’s website. Based on earlier data, the August June Sell in May difference in average returns is only 1.06% July (April [4.80%]-October [3.74%]). The Sell in May effect weakens by 75%, suggesting the pattern in the data may be spurious and not expected to hold in the future. Data is provided from National Climatic Data Center. 2 Gerstein Fisher Exhibit 2: US Market CRSP 1-10 Index Average Returns by Calendar Month (November 1926-October 2013) Winter Overall 1926-1949 1950-1969 1970-1989 1990-2013 November 1.48% -0.23% 3.12% 1.74% 1.60% December 1.79% 1.28% 1.79% 1.70% 2.42% January 1.57% 1.73% 1.39% 2.83% 0.53% February 0.55% 0.51% 0.31% 1.02% 0.38% March 0.80% -0.79% 1.52% 1.07% 1.49% April 1.34% 0.87% 2.02% 0.81% 1.66% Winter Total 7.86% 3.22% 11.33% 9.20% 8.30% Summer Overall 1926-1949 1950-1969 1970-1989 1990-2013 May 0.45% -0.11% 0.40% 0.26% 1.20% June 0.86% 2.77% -0.52% 1.40% -0.28% July 1.51% 3.07% 1.95% 0.22% 0.72% August 1.19% 3.06% 0.48% 1.92% -0.61% September -0.71% -1.87% -0.14% -0.70% -0.06% October 0.36% -0.69% 0.80% -0.15% 1.43% Summer Total 3.51% 5.88% 2.96% 2.62% 2.45% Winter-Summer 4.35% -2.66% 8.37% 6.59% 5.85% CRSP data provided by the Center for Research in Security Prices, University of Chicago.
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