‘Sell in May and Go Away’: What does it mean for stock market investors?

After a robust start to 2024 with gains of nearly 9% YTD, the S&P 500 trades flat over the last one-month. (FE Online)

May holds a special place in the world of stock markets., unlike any other month. The adage “Sell in May and Go Away” is one that stock market traders and investors frequently bring up. The idea behind “Sell in May and Go Away” is that the stock market underperforms in the summer months of May through September. ‘Sell in May and Go Away’ in no way implies that there will be a decline in the market during that month.

The Sell in May and Go Away approach suggests traders to think about selling their stocks in May, putting the money in a bank, and then getting back into the market in November. The idea behind the plan is that, because markets do not rise or fall much over the summer, staying out will help protect cash.

According to Corporate Finance Research, “Historical data have generally supported the “Sell in May and Go Away” adage over the years and since 1945. The S&P 500 Index has recorded a cumulative six-month average gain of 6.7% in the period between November to April compared to an average gain of around 2% between May and October. Furthermore, the S&P 500 typically generates positive returns roughly two-thirds of the time from May to October, while that percentage rises to 77% from November to April.”

After a robust start to 2024 with gains of nearly 9% YTD, the S&P 500 traded flat over the last month.

Kevin Matras mentions in his newsletter that there’s a theory developed by Yale Hirsch of the Stock Trader’s Almanac, suggesting that the stock market follows a pattern that correlates with a US president’s term. The third year of the presidential cycle has historically witnessed the best performance and we saw that in 2023 when markets ended at a high.

However, “Sell in May and Go Away” approach might not always be effective and might not be appropriate for all investors.

First of all, since they are meant to disregard short-term events that drive market changes, long-term investors do not need to take this strategy into account.

Second, some industries might work better in the summer than others. Investors who completely withdraw from the market for a few months run the risk of missing out on profit possibilities that present themselves during that time, particularly given the shifting economic landscape.

With the US elections six months away and the Fed likely to begin cutting rates in September, the US stock market is poised for tumultuous sessions ahead.

Reportedly, analysts at Bank of America told investors not to sell in May and go away as statistical data shows that presidential election years can see bug summer rallies. “The S&P 500 tends to have a summer rally, and Presidential election years can see big summer rallies,” said the bank.