Why Buyers Ought to Ignore The Previous Wall Road Adage “Promote In Might”

The Charging Bull or Wall Street Bull is pictured in the Manhattan neighborhood of New York on January 16, 2019.

Carlo Allegri | Reuters

The “sell and go away in May” strategy isn’t particularly popular on Wall Street this year.

Market professionals acknowledge that history clearly shows that the strongest six month period in the market is November through April, but they also say that it is not necessarily a factor that should shape investor plans each year.

“Any investment strategy you can put in some rhyme is likely to be a bad strategy,” said Jonathan Golub, chief strategist, US equities at Credit Suisse. Golub raised its S&P 500 target on Friday from 4,300 to 4,600 by the end of the year based on strong returns.

He said that market performance, on average, follows the pattern of weakness between May and October, but it is not a reason to get out of stocks.

“That would be perfectly reasonable if every single May looked exactly like May of the previous year,” said Golub. The comparison of this year with last year alone shows a great contrast.

“Last May last year, the market jumped off the ground.” He said the backdrop has now changed from a country and economy ravaged by the pandemic last year to a period when a booming economy and profits should continue to generate profits.

“Look at what we have this earnings season. US companies beat estimates by 22%. 22% is unknown. The economic data is phenomenal,” said Golub.

The second quarter is expected to be even stronger and these earnings reports will be released in July.

“I’m not selling in May and wouldn’t advise anyone else,” said Golub. “I think the biggest mistake you can make in a market like this is getting too cute and getting out early. You’d better try to stay a little longer than get out early.”

Market leader?

A view of the New York Stock Exchange building on Wall Street in downtown Manhattan in New York City.

Roy Rochlin | Getty Images Entertainment | Getty Images

Carter Worth, chief market technician at Cornerstone Macro, agrees that investors generally would not be well served to get out of the market in May and stay out until October.

However, this year he expects the market to enter a weak phase. Seasonal factors aside, Worth expects the market to be at the top.

“It’s a time to reduce exposure. Midsoles can last three to five months,” he said.

Studying the seasonal trend, Worth found that November 1 through April 30, the Dow’s performance was 27.8%, making it the fourth strongest for that six month period through 1896.

“After a particularly good six-month run from November to April, the next six months are poor,” said Worth. He added that after stocks rallied sharply, it could do so for any six month period.

The average return for the Dow for the top 10 years November to April was 27.5%, compared to an average of 2.9% in the following periods from May to October. The average total profit for the full year for the top 10 years from November to April was 23.7%.

For all years through 1896, the average return on the Dow was 5.2% from November to April and 2.1% from May to October. The average performance over all years was 7.3%.

Although Worth expects the market to have spiked in the short term, he said the seasonal investment strategy is the wrong approach.

“The six month period from November to April produced higher returns than the six month period from May to October 1896 to 2020,” he said. “But by far the best strategy, as everyone knows, is to expose the capital to the market year after year.”

Worth calculated that $ 1 million invested in the market from 1896 to 1896 by investors who then went for cash from May to October would have returned $ 164.4 million.

Investors who stayed all year would see a return of $ 672.6 million on that original $ 1 million.

A tendency towards a summer rally

The pattern of seasonal weakness from May to October is also evident in the S&P 500, but the average return has been positive 66% of the time since 1928, according to Stephen Suttmeier, technical research strategist at Bank of America.

He said that because the index had an average positive return of 2.2% over that six month period, the sell in May strategy leaves something to be desired.

Suttmeier said his study confirmed the bias towards a summer rally and the May-October decline was “back-end loaded”.

“Instead of selling in May and going away, buy it in May and sell it in July / August,” he wrote in a note. “The monthly seasonality suggests that sales are in the strong month of April, buying in the weak month of May, and sales in July through August before September, the weakest month of the year.”

The summer rally can be even stronger in the first year of a new president’s term. The market is strong in April and July, but there was also a solid return in May, says Suttmeier.

“This spring-to-summer rally and fall correction will be amplified in the first year of the presidential cycle, with April-June rising an average of 5.5% and August-October falling an average of 2.4%,” he wrote.

Any investment strategy that you can sum up in some rhyme is likely to be a bad strategy.

Jonathan Golub

Chief Strategist for US Equities at Credit Suisse

Sam Stovall, chief investment strategist at CRFA, also examined the “sell in May” phenomenon based on the performance of the S&P Equal Weight 500. This index gives each stock the same weight, not the market capitalization of the S&P 500 index.

By April 30, the S&P Equal Weight 500 was up 16.2% over the course of the year. This is the third strongest four-month start since the index began in 1990.

“Investors are now asking if this benchmark for unweighted US large cap stocks has gone too fast and too far,” Stovall wrote in a note.

He said history shows that such early strength is typically followed by a period when the market digests gains in May. The market can be volatile through September before outperforming the last three months of the year.

With all of the focus on “sell in May and go away,” investors should know that the story of the adage may have more to do with vacation than bailing out the stock market.

“Sell in May and go away” comes from an English saying, “Sell in May and go away and come back on St. Leger’s Day,” Cornerstone told Macro’s Worth.

St. Leger’s Day refers to the St. Leger’s Stakes, a thoroughbred horse race that takes place in mid-September.

“It refers to the custom of leaving the city of London to escape the hot summer months,” said Worth.

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