“Sell in May and walk away” is a well-known adage, but a flat summer last year and the year before, plus a significant rally this year are not nearly enough to support a claim of market “seasonality.”
In addition, this year is different from the last two years in an important way: it’s a Presidential Election year. So in addition to the forces of seasonality, the market will also be influenced by the effects of the Presidential cycle.
To break down whether seasonality is really a factor in the market I’ve reached out to two contributing analysts who have crunched the data for seasonality from a much longer time period, and taken into account the historical effect of Presidential Election years: InvesTech Research’s James Stack and The Bollinger Bands Letter’s John Bollinger.
Perspective #1: James Stack of InvesTech Research on “Sell in May”
InvesTech Research’s James Stack shows strong evidence that if you go away in May this Presidential Election year, you’re likely to miss a rising market.
Here’s what Stack wrote about Seasonality in Presidential Election years under the headline “Sell PANIC in May, and Walk Away RUN!”
“This ‘Sell in May and walk away’ maxim has become deeply ingrained in investors’ psyche—or perhaps we should say in their fears… While it’s prudent that investors have become knowledgeable about seasonality, there is a good chance that they’ve carried the belief a bit too far—particularly in an Election year.
“While it is true that the overwhelming majority of stock market gains over the past 80+ years have come from the opposing November-April time period, it is fallacy to believe that every summer holds an ominous correction for the stock market.
“In fact, most investors following this theory would be shocked to learn that a sizable majority (63%) of May-October periods since 1928 have ended with positive gains—even excluding dividends. And of those positive gains, almost two-thirds of them have been greater than 5%.
“There’s still more insightful information to be gleaned from past Election years. Over three-quarters of Presidential Election years since 1928 have experienced positive gains in this seasonally unfavorable period. So before battening down the hatches based on a single Wall Street truism, let’s take a broader view of the historical probabilities—and update the latest evidence.”
The Seasonal and Not-So-Seasonal Facts
“In years past, we have been one of the loudest voices about the six-month seasonality of the stock market. It is a truism based on fact, and one that shouldn’t be ignored—particularly in bear markets. Over the last 83 years, there have been 13 double-digit losses in the May-October period—however, all of them have been in bear markets.
“So here are some of the most important facts: Historically, there is a strong seasonality in the stock market where the majority of stock market gains have been made in the November-April time period—and this effect has become more pronounced in the past 60 years.
“So why not sell in May and walk—or even run—away? The answer lies in the historical data and weight of the current evidence, which is not tilted into the bearish camp. Here are other relevant facts about this six-month seasonality that surrounds the ‘Sell in May’ axiom: Whether looking at the past 60 years (since 1960) or 92 years (since 1928), this maxim proves correct less than 37% of the time. Simply stated, the stock market has risen in the May-October period in over 63% of past years.
“Although all double-digit losses during this May-October period over the past 92 years have occurred since 1960, they have all accompanied bear markets. In other words, there were other strong negative influences and warning flags present. Of the May-October declines that did not occur during a bear market, the average loss was a relatively mild -3.8%.
“So while the ‘average’ returns after May 1 appear rather anemic, there is no reason to abandon a prudent strategy and become a seasonal trader. In addition, there’s another possibly more important ‘seasonal’ pattern at work right now—and that’s the fact that it’s a Presidential Election year.
“There are two other ways of looking at the Election cycle and Presidential Election years that we feel are important right now. Let’s look at the quarter-by-quarter average gains or losses in the S&P 500 Index throughout the 4-year Election cycle. This is now the 4th year (Election year) in the cycle, and while the second quarter is on average a losing quarter, the third quarter, however, of the Presidential Election year is historically one of the strongest in the 4-year cycle. The fourth quarter is also historically positive, on average.
Sell in May Summary
“While a clear seasonal pattern exists between the opposing 6-month periods of May-October and November-April, the disparity in returns does not tell the whole story. The stock market still rises in the May-October time period almost two-thirds of the time. And the returns become more consistent and profitable in Presidential Election years.”
Perspective #2: John Bollinger of The Bollinger Bands Letter on “Sell in May”
Our second perspective on the intersection of seasonality and the Presidential Election comes from the well-known John Bollinger, editor of The Bollinger Bands Letter. Bollinger’s market timing system relies on a wide variety of ‘cycles,’ which can last from a few days to decades. So Seasonality and the Presidential Election cycle are right in his wheel house. Here’s what Bollinger wrote about the interplay between the two:
“When seasonals are working they are good guides, but when non-seasonal forces overwhelm them, doggedly sticking to the seasonal patterns can result in disaster. An important factor to consider is that some seasonals can influence other seasonal patterns. For example, the annual seasonal is strongly influenced by the four-year or presidential cycle, and that is the subject of this section.
“The ‘sell in May’ idea is really only evident in the last two years of the cycle and most pronounced in the third year. The fall volatility that so scares investors is evident in every cycle. The strongest period by far is the October to June period of the third and fourth years; we are in an election year, year one, so that would be last year and the year before. The weighted cycle emphasizes the downside risk in the second half of an election year, but that is driven largely by the sharp decline a rare event, like the crash of ’87, which ought not to significantly influence our thinking.
Sell in May Summary
“So, the seasonal road map that I see calls for a small correction just past mid-year, a peak before the elections, and then a nice rally after the fall lows interrupted by a swoon a month or so after the inauguration. Once again, this is not carved in stone, just a sort of bias for prices.”
The bottom line: if you’re going to use a historical tendency to inform your investing, you must look back further than the last two years, and make sure you have the numbers right. Of course, even then, as fund managers say, “Past performance is not a guarantee of future returns.”
Wishing you success in your investing and beyond,
*This post has been updated from a previous version