“Sell in May and go away” is an old Wall Street adage suggesting summer months offer lack luster returns. The inference is investors are better off liquidating equity positions and enjoying their summers worry free. In fact, many songs have been written by the Beach Boys, Marvin Gaye and others about the picturesque carefree summertime.
The origins of the saying is unknown, but it is believed to have originated in London as merchants and bankers would vacation in the contryside. American investors adopted the phrase which accompanies the quintessential American summer vaction filled with road trips, camping or lazy beach days.
The reasoning for “Sell in May and go away” seems pretty sound… diminished demand sould reduce earnings. That may have been the case in the past, however reality is not that simple. Businesses continue to sell products and offer services to paying customers. Consumers merely alter their purchase preferences and priorities. And, in the current world of subscription services, the summer lag is less prevalent.
Basic investment theory would also reject such a cliché. Investors and trader are a competative group. They will exploit any market inefficiency to their advantage and should this simple phrase encapsulate bona fide market inefficiency, traders would simply sell stocks to profit from a downward movement. Inefficiency gone.
A review of the actual returns may reveal the the saying’s integrity. We reviewed summer month return (June – August) for the past 70 years. Interestingly, 73% of the time produced positive returns while only 27% of the time produced negative returns. Further examination shows the average three month return was 2%, which annualizes to about 8%. This is not too far off from the long-term annualized return for stocks. The historical record also indicates summer months can experience declines. In other words, like any other inveting period.
Other items investors should also consider would be the tax impact of such a strategy. Assuming consistent annual implementation, this would mean all realized gains would be short-term capital gains taxed at ordinary income brackets, not lower long-term capital gains brackets. Lastly, investors would have to determine a correct reentry point, a near impossibility.
In some ways investing emmulates life and the investment discipline can’t be boiled down to a simply phased formula. Diligent observations and analysis of economic and market developments are the best proven ways to guide investment portfolios.
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