“Sell in May and go away, don’t come back until St. Leger’s Day“. This stock market trading strategy has existed for centuries, stretching back to the days when London Stock Exchange brokers vacated the City during the summer months, returning after the St. Leger horse race in Doncaster in mid-September.
But how relevant is stock market seasonality today? Do shares underperform as the weather improves? And should I heed this long-standing warning?
Let’s explore.
Seasonal returns
According to data compiled by investing platform eToro, this strategy may have some merit. Looking back at the historical performance of FTSE 100 and FTSE 250 shares over decades, some notable seasonal differences emerge.
In fact, the average monthly return for both indexes for the May-October period was negative. The FTSE 100 returned -0.04% and the FTSE 250 recorded a -0.14% return. Contrast that to the November-April period, where the historic returns were +1.09% and +1.56% respectively.
There are a number of theories that seek to explain the stock market’s underperformance in the summer. Some suggest that, as investors go on holiday, a lack of trading volume and less liquidity can weigh on share prices.
Others point to widespread portfolio rebalancing as the culprit. Or perhaps investors become overly optimistic during the spring as the weather improves, leading to lacklustre returns in the subsequent months.
Whatever the causes, the historical data seems to add credence to the perennial presence of the “sell in May” narrative.
Problems with market timing
However, I don’t think it’s a foregone conclusion that my stock market portfolio will underperform for the next six months.
There’s another investing mantra that I always bear in mind: past performance doesn’t guarantee future results. In essence, just because a pattern has emerged over bygone years, that doesn’t necessarily mean it will endure in the future.
Each year is unique. In some years, stocks will underperform during the May-October period, but other years will buck the trend. So, will 2023 fall in line with the historical average?
There’s no way to know for certain, but if I choose to avoid the stock market for the next six months I run the risk of missing out on any share price gains that materialise.
Plus, although broad statements about the average performance of hundreds of stocks can be helpful, they don’t apply equally to each individual company. In all likelihood, some will deliver impressive returns over the coming months.
Indeed, that’s the collective endeavour we at The Motley Fool are engaged in. Trying to find the best stocks to buy in our quest to make the world smarter, happier, and richer.
Should I sell in May?
Regarding my own portfolio, I won’t be selling my shares in May. Not only do I want to receive passive income in the form of dividends, but I also want to avoid paying commission fees I’d incur by selling and buying again at a later date.
Ultimately, I’m a long-term investor. I’m not especially preoccupied with the stock market’s performance over the next six months, compared to the next six years and beyond. I hold my stocks through good times and bad, so selling my shares in May isn’t the play for me today.
