But could there actually be some substance to this old maxim?
OK, for those not familiar with it, the saying is: "Sell in May, and go away; don't come back until St Leger day"; the St Leger a classic horse race that takes place every September at Doncaster, and will be run this year on the 11 September. You see, we're here to help.
And if there's one thing the financial press likes more than a scary aphorism, it's a scary aphorism that rhymes!
While my instinct is to dismiss this as nonsense, this particular maxim actually has some theory and data behind it.
The theory
There are several reasons why investors might be better off in cash over the summer months, and return to shares for the winter, including:
- traditionally, or perhaps just stereotypically, decision-makers in the City spend the summer flitting between the social and sporting events at Royal Ascot, Wimbledon, Henley, and so on, so the fort is manned by the juniors and nothing much happens;
- in traditional agrarian economies, farmers cashed in their investments and took on debt in spring in order to buy seed and plant their crops, but after the autumn harvest they had cash to invest; and
- to the extent that people's moods are affected by daylight and good weather, it may be the case that investors are more optimistic as the days become brighter and the summer evenings start to stretch. They may therefore be more willing to take a rosy view of a company's future prospects in spring, and consequently pay more to own it, while being more sceptical in the autumn. As Keats put it: "Four Seasons fill the measure of the year; there are four seasons in the mind of man."
Studies have been unable to find any significant evidence for the traditional explanations, while debate continues regarding the affect of the weather on our decision making.
The data
The table below shows the changes in the value of the FTSE 100 for each full year, and also the changes from May through September:
| Year | Annual
change
% | May to
Sept
% |
|---|
| 1984 | 22.4 | -0.6 |
| 1985 | 16.1 | -0.4 |
| 1986 | 18.3 | -3.8 |
| 1987 | 3.9 | 14.8 |
| 1988 | 2 | 0.3 |
| 1989 | 36.5 | 8.8 |
| 1990 | -12.6 | -4.1 |
| 1991 | 17.1 | 5.5 |
| 1992 | 14.8 | -3.3 |
| 1993 | 19.1 | 8.1 |
| 1994 | -10.1 | -3.8 |
| 1995 | 20.3 | 9.3 |
| 1996 | 10 | 4.9 |
| 1997 | 28 | 19.6 |
| 1998 | 13.2 | -18.3 |
| 1999 | 13.3 | -8.6 |
| 2000 | -7.3 | -1.4 |
| 2001 | -15.5 | -19.3 |
| 2002 | -23.2 | -25.9 |
| 2003 | 13.6 | 4.2 |
| 2004 | 7.5 | 1.8 |
| 2005 | 16.7 | 14.1 |
| 2006 | 10.7 | -1.0 |
| 2007 | 3.8 | 0.3 |
| 2008 | -31.3 | -19.5 |
| 2009 | 22.1 | 21.0 |
26-Year
Average | 8.1 | 0.1 |
(Not including dividends)
So we can see that the London market has, on average, treaded water for the summer months. In 13 of the 26 years, the market fell during the summer, despite suffering an annual fall in only six of those years.
Is it worth trading?
If we estimate the cost of a 'round trip' -- selling in spring, putting the money on deposit, and buying back in autumn -- to be about 3% , then this strategy would only have been profitable in nine of those 26 years.
Note also that there is a huge variance in the market returns; last year's gains were nearly all made over the summer, and a seasonal trading strategy would have missed that.
Having started with one old saying, let me leave you with another:
"October is one of the peculiarly dangerous months to speculate in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February." -- Mark Twain.
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