While efficient-market theorists will cringe at the thought, the old market adage “sell in May and go away” has not gone away, and the calendar summons all financial journalists to take a fresh look at the latest thinking on this issue.
The idea that stocks outperform and underperform in seasonally predicable ways makes no sense to efficient-market types, since rational profit-seeking investors would exploit this effect and arbitrage away the advantage.
Nevertheless, as May kicks in, the financial blogosphere is charged with updated analysis mainly reaffirming the phenomenon.
In a research note from Wesley Gray, who blogs at Turnkey Analyst, the portfolio manager and Drexel University finance professor cites research showing that the “Sell in May” effect outperforms in 36 of 37 developed and emerging markets.
An updated study he cites showed the effect held — with winter-season stocks beating summer-season stocks by an average 6.25% — even under an expanded time horizon of 319 years across 108 markets.
“This effect is prevailing and statistically significant everywhere and all the time!” Gray writes, noting it has actually strengthened in recent years.
Gray’s money management team added their own tests of the strategy using 13 different asset indexes — ranging from equal-weighted S&P 500 to MSCI emerging markets to a 10-year bond index — over an 87-year period.
Gray compared selling in May (and buying back in November) to the opposite strategy (buying in May and selling in November) and both to a buy-and-hold strategy over an 87-year time horizon.
“The results show that November-April period returns substantially outperform the May-October period returns, with an average difference of 8.22% in equity markets, and 3.42% in alternative markets,” he writes. “Only the bond market shows insignificantly underperformance of [the] ‘sell in May strategy’ (-0.73%).”