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Why ‘Sell in May’ could be a disaster in the 2020 stock market crash

The suggestion to ‘Sell in May and go away is a common one, and it’s re-examined every year at this time. But does it make any sense?

It’s based on the observation that the period from May through October typically shows poorer stock market performance. And it’s not just anecdotal; there’s genuine statistical evidence for it.

So, some stock market pundits suggest we should sell in May and move to cash-based investments of some sort. Then, sometime in the autumn, do the opposite and get back into shares in anticipation of the next upswing.

Academics and market analysts have come up with all sorts of suggestions for what lies behind the effect. But I can’t help wondering if it’s just one of those self-fulfilling things.

April has been the best performing month for UK shares for decades, and 2020 was no exception. Even in the depths of the Covid-19 pandemic, April 2020 was the second best April of the past decade, producing a 4% gain for the FTSE 100.

Why sell in May?

If people expect April to be the best month, followed by a weak few months starting May, could their response actually be making it happen? I’d expect a higher volume of cash going into shares in early April to push prices up. And then I’d expect those following the ‘Sell in May’ mantra to push prices back down again.

So maybe it happens because people expect it to happen, and end up making it happen. Still, whether my hunch is right is not really important. What matters is whether selling in May is a sensible strategy to follow.

The first thing I wonder is what I’d do with my investment cash if I sold all my shares. Put it in a Cash ISA offering around 1% per year for six months? That would earn me enough to pay the stamp duty when I eventually re-invested in shares. But I’d still have to pay two sets of broker’s fees, when I sell now, and when I buy back again.

Losing strategy

So ‘Sell in May’ is a guaranteed losing strategy from that standpoint. And I don’t see that as a great way to try to beat the traditionally weakest half of the year for shares.

It doesn’t make any sense to me any year, but especially not this year. Thanks to the pandemic, the FTSE 100 is at its lowest value entering May for eight years. We have to go back as far as 2012 to find and end-of-April FTSE 100 valuation that’s lower than this year. It’s not the time to be selling shares, I say.

I’ve no idea where the FTSE 100 will go in May, obviously, or in the following few months. But how about in six months’ time? I reckon the chances are heavily stacked in favour of shares this year, and that those who hold on will see profits. I’m certainly not going to sell in May.

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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.