The adage goes “Sell in May and go away” with the idea to buy back in after Halloween. It is the premise that the market has seasonality to it. As spring follows winter, the market performs better from October- April compared to May – October.
Is there any truth that investors should look at buying back in at Halloween?
Crunching the numbers
On average, the worst months of the year are March, April, and September. The best months are April, July, October, and December.
October to April
October to April tends to be a period that outperforms. Since 1980, the average return has been 5.5% for this period. That compares to selling in May (and going away) which has an average return 1.9% over the period.
Do statistics lie?
The numbers do not tell the whole story. While the Sell in May outperforms when you look at average performance, when looking at the number of positive performances for the period, Sell in May has much more positive performances.
In addition, when looking at the last 40 years, the October to April period has outperformed in only 13/40 years.
In the last 10 years where the adage has not worked, the market has returned an average 5.7% in that period. Hence, relying on the rule “Sell in May and go away” may mean missing out on significant returns when it is incorrect.
While this adage has been around for a while, you cannot rely on the statistics. It is important to focus on themes driving the market.
Looking to the next 12 months, with a key driver of positive returns being stimulus and a Covid-19 vaccine, there is a high probability that the market will continue to rise further on the back of recovery from Covid-19 and a stimulatory business environment.
The risk to that scenario would primarily be an increase in Covid-19 cases with a lack of movement on a vaccine.
At Burman, we focus on what is happening in companies as well as the macro environment. Stimulus and expected stimulus remain a key driver of market returns.