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The costly myth of “sell in May”
May 2025's strong returns for US stocks have once again shown that putting too much weight on seasonal patterns will only make investors poorer, says Max King
The S&P 500 has just notched up its strongest May since 1990, closing up 6% over the month. This contradicts the old adage of “sell in May and go away”, which has been perennially popular with gloomsters ever since it was coined by Yale Hirsch of the Stock Trader’s Almanac in 1950. Hirsch noticed that Wall Street’s performance in the six months to April was notably better than in the six months to October. Since then, the pattern has continued to work. Since 1950, the S&P’s return in the six months to the end of April has averaged 7%, calculates Saxo Bank, but just 1.8% in the six months to the end of October.
However, this finding hardly supports selling in May. Rather, the lesson is not to expect much from the markets in this period and you can normally leave new investment till the autumn. This applies to all markets: the world – including the UK – dances to Wall Street’s tune. The UK’s FTSE All-Share index rose just 3.5% in May – although it is up 5.5% in the year to date, compared with a gain of 0.7% for the S&P 500.
Shifting cycles
The best explanation for the seasonal pattern of markets relates to the annual earnings cycle. By the spring, the corporate results for the previous calendar year are all in and the guidance for the current year, supported by the first quarter’s trading, is reasonably firm. Next calendar year is too far away to be discounted so there is little to shift expectations till the autumn. Then, the next year looms into view and the corresponding uplift to corporate earnings starts to be discounted, a process that takes six months in which markets tend to rise.
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An increasing emphasis in recent years on quarterly earnings has probably dampened the pattern so that it doesn’t work as once did. The pattern can also be interrupted by extraneous events: if these hold the market back in what should be the strong six months, a catch-up is then possible.
That is what happened this year. Against the seasonal pattern – and despite intermediate strength into February – the S&P500 fell by 2.4% between October and May and by 5% in the first four months of this year as investors got into a mild panic about Donald Trump’s tariff strategy. This left room for a catch-up in May, though that doesn’t mean that market strength will necessarily continue.
However, the S&P 500 rose 4% in May 2024 despite having risen nearly 20% in the previous six months. We had seen a down year in 2022 before the first ten months of 2023 saw a tentative recovery. Confidence subsequently improved as earnings growth picked up and the market continued to rise throughout 2024.
Yo-yo years
It’s hardly surprising that a market that has risen strongly and is expensive should be vulnerable to a fall. Maybe this is more likely to be in May than in most other months, but this also explains another myth – that of October being a dangerous month. The market crashed in October in both 1929 and 1987. However, in 1929, that came after it had risen 24% to its early September peak after 29% in 1927 and 48% in 1928. In 1987, markets rose 50% to its October peak and then lost all the gain in barely a week, ending the year slightly ahead.
Why was 1987 such a yo-yo year? Investors were carried away by market euphoria. There was a growing sense that the economic reforms championed by Reagan and Margaret Thatcher heralded a great future for markets. Professionals had also put a lot of faith in computer-based strategies that would sell quickly if markets stalled. This didn’t work out well, since everybody rushed for the exit at the same time.
Investors got carried away by Reagan and Thatcher in 1987, says Max King.
(Image credit: Bettmann / Getty Images)
Yet October is more notable as a “bear-killer” – turning the tide in at least ten bear markets – than as a month of crashes, says the Stock Trader’s Almanac. Statistically, September is actually the weakest month, with an average return since 1950 of -0.7%, but the average hides a wide divergence of outcomes.
Buy the dip
Commentators can easily forget that the volatility of stock markets is the short-term price of superior long-term returns. The MSCI World index has fallen by more than 10% in 30 of the last 53 years, points out Duncan Lamont of Schroders. It has declined more than 20% in 13 of those years, falling just short of 20% this year. “Being spooked by volatility could cost you in the long run, so the right response is likely to be to stay calm and stick to your plan.”
US retail investors, especially younger ones, are less inclined to be panicked by volatility – they have become hard-wired to “buy the dip”, notes strategist Ed Yardeni. “It’s steeped into their consciences that stocks are for the long term. I think they are right to buy the dips. I hope we get a debt crisis in the next few months because it will probably be resolved as we scare the living daylights out of the politicians. The time to watch out is when the pessimists become optimists.” If only UK investors thought like that.
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Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
