Investors may be familiar with old market sayingssuch as "sell in May and go away, come back on St Leger Day" (in mid September). But should you follow their advice?
There is certainly some evidence that returns are higher in certain months than others. For example, between 1950 and 2015 the S&P 500 returned 7.8% a year from November to April, compared with just 0.3% between May and October, according to Tom Stevenson of fund manager Fidelity. In the UK market, returns in winter months have consistently outperformed those in summer months, according to Ben Jacobsen and Cherry Zhang of Massey University in New Zealand.
And not only are some months better than others, but there is even evidence that some days of the week are better for investors than others. Between 1953 and 1970 the S&P 500 produced negative returns on Mondays, ending the day up less than 40% of the time, but strongly positive returns on Friday, rising nearly two-thirds of the time, according to a study by Frank Cross in 1973.
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Such studies may be the result of "data mining" in other words, if you look at enough data hard enough, you will eventually find the picture you're looking for. Similar trends do at least appear to apply, however, to stockmarkets in Denmark, France, Germany, Hong Kong, Italy, Japan, Norway and Sweden too, according to Peter Hansen of Brown University. Interestingly, southern hemisphere countries do better during their winter (which is our summer), suggesting that this may be relatedto sunlight and the length of the day, according to a 2002 paper by Mark Kamstra, Lisa Kramer and Maurice Levi.
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Of course, spotting a relationship and being able to take advantage of it are two different things. Hansen found that the impact of seasonal effects has declined over time, suggesting that awareness of the anomaly has led investors to adjust their behaviour.
Transaction costs also need to be taken into account. Indeed, having to pay the bid/ask spread (the difference between the buying and selling price) eliminated most excess returns from this strategy in the UK for the period between 1986 and 1997, according to research by Andros Gregoriou, Alexandros Kontonikas and Nick Tsitsianis of Brunel University. This implies that investors would be better off sticking to a "buy-and-hold" strategy than buying and selling with the seasons.
