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It’s that time of year again when we’re all reminded of one of the most famous sayings on Wall Street: “sell in May and go away.” The concept is simple enough. The stock market tends to perform better on average in the November through April period than the May through October period. The performance differential is statistically significant and has been persistent over time.
Many market participants take the saying at face value and interpret “go away” to mean “go to cash” or “short the market.” However, the data since 1928 does not suggest this is the appropriate interpretation. In the Table below, you’ll notice that while the average/median returns in the May through October period are lower than the November through April period, they are still positive. In fact, the S&P 500 has posted positive returns in the May through October period 64% of the time, only marginally lower than the 66% of positive returns in the November through April period.
Therefore, long-term investors would actually be wise to ignore the many calls to “go away” from May through October as they would, on average, be missing out on periods of positive returns.
For our part, while “sell in May” is certainly an interesting phenomenon, it is not a tradable investment strategy. To us, underlying conditions trump seasonality and our quantitative process is continuously evaluating these underlying conditions as a guide to portfolio rotations. Looking back at recent history, it is easy to see why blindly following a strict interpretation of “sell in May” can be highly sub-optimal at times.
While “sell in May” worked well in 2008 (-30.1% from May-Oct) as the economy was in a recession and the stock market was in the middle of a Bear Market, 2009 was an entirely different story. The stock market bottomed in March of 2009 and the economy was entering a new expansion by June. From May through October 2009, the S&P 500 would advance 18.7% and was up in each one of the “worst six months.”
In 2010 and 2011, the market would decline in May through October but in both of those years it was not a straight line down as we saw sharp intermittent rallies along the way. 2012 posted a slightly positive return from May through October but again it was not a straight line, starting off very weak with a 10% decline in May-June followed by a rally higher. In 2013, similar to 2009, we saw a strong move higher (+10%) which completely ignored the “sell in May” adage.
What will occur this year? It remains to be seen but instead of focusing on “sell in May” we will adhere to our process and defer to what the underlying conditions are telling us. In the traditionally bullish January through April period, the underlying conditions were mostly suggesting caution was warranted. We saw significant outperformance by the Utilities sector and long-duration Treasuries in the first four months of the year, two market anomalies we recently wrote about in award-winning papers (click here for our paper on Utilities; click here for our paper on Treasuries). As such, we maintained a defensive posture in our ATAC strategies for much of this period.
In early May, when seasonality was supposed to turn bearish, we took the other side and shifted to a more aggressive posture in portfolios as underlying conditions were starting to improve. That’s where we stand today but we remain on high alert for weakness in underlying conditions, especially given where we are in the cycle and the factors suggesting we could see a rise in volatility at some point this year. Should these conditions begin to weaken, we are prepared to rotate away into more defensive areas of the market.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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