We've just had the St Leger Stakes – the final classic of the British flat-racing season – so if you believe in investment cliches, now should be an auspicious time to get back into the market.
“Sell in May and go away, come back on St Leger day,” runs the old saying, alluding to the long-standing belief that stocks tend to perform best in the winter months and less well in the summer. Supposedly, this pattern arose because market participants used to retreat to the country for leisure as spring and summer arrived so investing activity dried up. Whether this was really the case isn’t clear. In any case, there’s no reason why the trading habits of Victorian gentlemen should have any bearing on modern markets. Yet the idea that the summer is riskier persists and this adage has been making the rounds more often this year, reflecting a touch of nervousness in the market.
So is there any truth in it? Looking back to 1970 using the MSCI UK index, returns between the start of October and the end of April have been much better on average than returns between the start of May and the end of September. The winter months averaged 9.4%, while the summer months averaged -1.15% (yes, a loss on average). This pattern still holds if we move our start date to 1984 (when the FTSE 100 begins) or to 2000 (since when the UK market has not made much progress in price terms).
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Market averages can be misleading
However, averages can be misleading. From 1970 to 2023, the return from only being in the market between September and April would have beaten the return from holding all the way from September to September in 25 years. Yet holding for the full year would have done better in 28 years. We haven’t got to the end of September yet but, unless there is a big sell-off, this year looks like being more of the latter. Despite the volatility in late July, the market has been up since then. Note too that this is price return, not total return. If you factor in the dividends that an investor would have missed by not holding over the summer, the hit rate was worse.
Sell in May has probably only come out ahead one-third of the time. That said, the worst legs of some of the most savage bear markets have fallen in the summer months (1974, 2001-2002, 2008). So if you calculate the long-term performance of a strategy of selling in May and buying back in September every year, it can seem to beat buying and holding (depending on where you start). However, this is entirely due to a tiny number of extreme events. Knock them out and the outperformance fully reverses, suggesting that it’s a statistical fluke.
Arguably, some degree of summer weakness may still be a real phenomenon: May, June and September have negative returns on average and have been negative a little more frequently than they have been positive (see above). Yet the odds of avoiding losses by selling for the duration of the summer have been worse than a coin toss. Instead, we might tentatively conclude that, if anything, investors should look for chances to buy more cheaply in these months, given that markets have been more likely to rise in the rest of the year.
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