Does the old investment adage to “sell in May” still hold true?

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The first week of May is notable in financial journalism circles for the sudden oversupply of articles pointing out what week it is and then posing the question: “should we sell in May and go away?”

Ahead of the crowd, as I always am, I thought I’d beat the crowd this year and ask the same question a week early. 

It’s May next week. The stockmarket, pretty much wherever you are in the world, has had one heck of a run. Should we, “sell in May and come back on St Leger Day?”

We’re still in a bull market

It’s very tempting to say, “yes”. With stockmarkets so buoyant, surely one should take profits and await a correction? On the other hand, a trend is a trend, and we are in uptrend. Why try and scalp a top? The market could go a lot higher yet and you would miss out.

I must say, I’m in the latter camp. It’s a bull market. Hold, is my advice.

What’s more, selling could mean a taxable profit (unless you are operating through some tax efficient vehicle such as a Sipp or ISA). Are we so confident that we can re-enter this market in the autumn at a price that is not only lower than where we are today, but also so much lower that it becomes worthwhile to take on an additional capital gains tax liability?

In all probability, the answer is no. 

Imagine how galling it would be to see the market higher than where you sold, and for you to have a tax bill too (there in a nutshell is one of the most compelling cases for buy and hold: taxation reduces market activity.)

St Leger Day, by the way, falls in the second week of September. The St Leger Classic is one of the oldest English horseraces, the final leg of the Triple Crown, and it marks the end of the English summer. 

The Americans have adapted the saying to, “Sell in May and go away, come back on Labor Day”, which comes a week or so earlier, on the first Monday in September. The point of the maxim is to sell in the summer; the market goes down in the summer.

The wisdom of the adage dates to a time when markets actually did slow down over the summer, because most participants – bankers, brokers, traders, aristocrats – would abandon the insufferable heat of the city in summer and retire to their summer retreats, either in the country or abroad. 

Taking a summer holiday was a much longer affair than it is today. Even just the travel time took longer – commercial air travel was not as widespread, for example. Whereas today we can fly to where we want to be in a few hours, back then it might have involved several days’ travel by rail or boat. And once they arrived at wherever they were going, they stayed there for longer.

The world has moved on

Back in the day, real human beings placed trades. Today, innumerable computers, quants, algos and bots are doing the work for them, and they don't need time off. It's one of the reasons employers are so enamoured of them.

Then there is smartphone, the laptop, the iPad. Even on holiday, we all spend our time staring at them. Wall Street and the City may be abroad in their holiday homes, but they are still connected. It’s almost impossible to get away, even if you wanted to. 

So the wisdom behind the maxim no longer applies. Markets no longer slow down over the summer, or if they do it’s only marginal. Heck, markets don’t even sleep any more. You might have good reason to sell now – overbought or something – but the time of year should not be one of them.With each passing year, the sell-in-May strategy gets less and less relevant.

The strategy did used to work, at least to an extent. Analysis by LPL Financial research has shown that from 1950 to 2013  the Dow Jones Industrial Average posted lower returns over the summer. That doesn’t necessarily mean the market went lower, it just had lower returns.

But since 2013, however, this seasonal pattern has not applied, and those who sold have missed out on significant stockmarket gains.

By the way, my observation is that many stock market crashes seem to happen in October, so maybe sell in September and buy in November works better as a seasonal strategy.

So there you go: a nice little adage, with a nice story to it, but no longer one to invest by. There might be a reason to sell next week – it’s very possible that markets will head lower over the summer, but it’s just as possible that they will go up. So don’t let me catch you using “Sell in May” as your justification for making any decision to sell.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.