Understanding 'Sell in May and Go Away'

Understanding 'Sell in May and Go Away'

You've probably heard the saying 'Sell in May and go away,' which comes from the idea that stocks historically underperform during the six months from May to October. This adage gained popularity through the Stock Trader's Almanac, which claimed that investing in the Dow Jones Industrial Average from November to April—the 'winter' period—and switching to fixed-income investments for the 'summer' months produced reliable returns with reduced risk since 1950.

But here's what they didn't mention: if you look at the S&P 500 index, which goes back to 1927, the data tells a different story, with summers often outperforming winters. My analysis shows summer returns were 11.23% higher in the 1930s and 4.51% higher in the 1940s for the S&P 500 compared to winter months. For these reasons and others, the adage has been widely disputed.

Key Takeaways

Let me break this down for you directly: 'Sell in May and go away' points to weaker stock performance from May to October versus the rest of the year. Since 1990, the S&P 500 has averaged around 3% returns from May to October, compared to about 6.3% from November to April. That said, winter doesn't always beat summer. If you're looking at historical data, you might consider shifting to less economically sensitive stocks during summer to capitalize on patterns. But for most of you, the smartest approach is to buy and hold equities and ignore the seasonal noise.

Seasonality and Stocks

Nevertheless, over the long term and on average, stocks have performed worse during the warmer months in recent decades. For instance, from 1990 to 2023, the S&P 500 gained an average of about 3% from May to October, versus 6.3% from November to April up to 2024. If we extend back to 1930, those figures shift to about 3% for summer and 4.5% for winter.

You might wonder why this difference exists and if it's worth switching to bonds in summer. Even with the gap, summer returns for the S&P 500, when annualized, are still solid and often better than other securities. As I'll explain, most investors should stay invested during summer. Let's dive into the data.

Why Is There Seasonality to Stock Prices?

Seasonal rhythms in the stock market are something traders have long tried to predict. The causes are debated among experts, but one straightforward explanation is lower trading volumes due to summer vacations. However, percentage changes don't always align with demand shifts from volume drops. We need to consider human psychology, institutional behavior, and macroeconomic forces for these divergences.

Summer doldrums aren't the only calendar effects some investors track. There's also the 'January effect,' where stocks, especially small caps, tend to rise early in the year—possibly from tax-loss harvesting in December or new-year optimism. But as markets get more efficient, this effect has weakened. Looking at the SPDR S&P 500 ETF from 1993 to 2023, there were 17 winning Januaries (57%) and 13 losing ones (43%), just slightly better than chance.

Institutional factors matter too. Many mutual funds end their fiscal year in October, leading to rebalancing and 'window dressing'—selling losers and buying winners to polish reports. This can pressure prices in certain sectors and contribute to seasonal patterns.

Why Not Sell in May and Go Away?

The problem with relying on historical patterns for trading is that they don't reliably predict the future, and once widely known, they fade as others exploit them. If everyone started selling in May and buying back in November, early movers would shift to April and October, erasing the edge.

Even if the pattern holds, exiting equities in May and reentering in November means missing opportunities. S&P 500 data shows a general winter outperformance trend, but it's nuanced based on specific years and your own trading goals. Imagine starting with $300 in 1990, investing $100 only in winters and $100 only in summers, pulling out at the end of each period (ignoring costs, including dividends).

The summer $100 would grow to $249.33—not as much as winter, but still a strong positive return you'd miss by sitting out. Plus, there are years like 2020 when summer returned 24% versus winter's -7.7%, or 2009 with 21.9% summer versus -9.4% winter. Following the adage blindly could mean forgoing big gains.

Timing the market this way also brings transaction costs and taxes that erode returns, ignoring dollar-cost averaging and dividend benefits. Averages hide yearly fluctuations, where seasonality is often overshadowed by elections or other events. For example, since 1950, the S&P 500 rose 78% of the time from April to October in election years, versus 64% in non-election years.

Finally, it might not be about seasons but specific months, like September being weak. Average monthly returns for major indexes since inception, and S&P 500 data from 2014 to 2024, point more to individual months than broad summer issues.

Alternatives to 'Sell in May and Go Away'

If you believe in the pattern but don't want to exit stocks, consider rotating to sectors that hold up in weak markets. A CFRA report notes that cyclical sectors like consumer discretionary, industrials, materials, and technology outperform from November to April, while defensive ones like consumer staples and healthcare do better in summer. Since 1990, those defensive sectors averaged 4.1% gains from May to October, beating the broader market.

This idea underpins ETFs like the Pacer CFRA-Stovall Equal Weight Seasonal Rotational ETF (SZNE), which rotates between defensive stocks in summer and sensitive ones in winter. However, since 2022, the S&P 500 has outperformed it, and SZNE's 0.60% fee is 12 times higher than a typical 0.05% S&P 500 fund.

Time in the Market vs. Timing the Market

Most professionals advise against 'Sell in May' because it promotes constant portfolio changes. You're generally better off with buy-and-hold, as even pros can't consistently beat holding the S&P 500 long-term. Staying in equities year-round cuts fees, avoids panic decisions, and yields better returns, backed by plenty of evidence.

Take Charles Schwab's analysis: investors get $2,000 yearly from 2003 to 2022. Perfect timing (buying lows) yields $138,044; immediate investing each year gives $127,506; dollar-cost averaging $124,248; bad timing (buying highs) $112,292; cash only $43,948. It shows that just staying in a broad index works, and imperfect timing isn't disastrous.

What Is the Best Month to Buy Stocks?

Since 1950, April and November have been the strongest months on average, but it's not consistent—April 2024 saw negative S&P 500 returns, for example.

Is May the Worst Month for Stocks?

History ranks May as the second-worst month after September, but it's been positive in years like 2024 and 2020. It depends on the index: November tops for Nasdaq, July for S&P 500 since inception.

What Is the Best Time of Day to Buy Stocks?

It depends on your style. For long-term investors, time of day doesn't matter with solid picks. Late morning to early afternoon offers stability after morning volatility and before close. Short-term traders seek volatility, so open or close is better for profiting on small moves.

The Bottom Line

'Sell in May and go away' gets a lot of attention, and over some decades, stocks do average worse in those months. But with many exceptions and summer performance not bad enough to justify big changes, you should stick to your portfolio unless fundamentals shift.