Investors were wrong to sell in May – has the old adage had its day?

13 September 2017

Stock picking is full of different adages and dictums. Some are sensible and good advice – buy low, sell high and the rest. Others are simply not worth the paper they are written on.  

The "Sell in May and go away" St Leger adage falls into the latter category, if the latest research is to be believed.

Fidelity International analysed the returns of the FTSE All Share between 1 May and 1 September over the past 30 years to test the adage.

They found that the index produced positive returns over these months in 18 out of the past 30 years. So, anyone following the advice to ‘sell in May and go away’ would have in fact lost money for most years in that period. This year selling in May failed to pay off, with the FTSE All Share index notching up a return of 4.4% over the four month period.

According to Tom Stevenson, investment director for Personal Investing at Fidelity International, "perhaps it’s time to retire this old maxim".

"Our analysis shows that it’s a bit of a lame horse. Had you followed the adage over the past 30 years, you would have been worse off 60% of the time," he points out.

"While the summer has seen its fair share of geopolitical risks, including rising tension between North Korea and the US, as well as stalling Brexit negotiations, the FTSE All share has still gone on to deliver a positive return between May and September. As such, anyone who followed this stock market adage this summer would have lost out."

Stevenson adds market timing is a "fool’s errand" and instead investors should stick to their knitting and instead remember that "time in the market matters more than timing the market."

Sell in May – where the old saying comes from

The theory is that as stock market traders treat themselves to a leisurely summer 'season', attending sporting and social events, including Royal Ascot, Wimbledon, the Henley Royal Regatta and Cowes Week, share prices dip because there are fewer investors buying and selling.

This causes thin trading volumes, which is often cited as a reason behind sudden market sell-offs. The old adage says investors should return to the stock market once the St Leger Day horse race has taken place, which this year takes place on 16 September this year.

However, as the research from Fidelity shows, investors would have been better off remaining invested in five of the past six years. As a result of changes to financial services over the past few decades, the theory no longer holds true. 

According to Jason Hollands, managing director at TilneyBest: ‘These days, if a City professional is off on summer holiday, they're almost sure to be forever checking news from the markets on a mobile phone or tablet, as information is now incredibly accessible and the boundaries between working hours and personal time have eroded.

'Therefore when putting seasonality theories such as 'Sell in May' to the test, it is probably more relevant to only consider data since the 'Big Bang' deregulation of the City in 1986 rather than longer periods when the London markets operated as a gentleman's club.

'And over this 30-year period there is not a convincing case that it makes sense to generally exit the market between May and mid-September and that's without factoring in the impact of trading costs or potentially crystallising capital gains tax liabilities.'

Other stock market trends

This isn’t the only supposed pattern based on the historic performance of seasons. September is often viewed as the market’s coldest month. The Dow Jones Industrial Average has averaged a 1.1% loss in September over 100 years. The month sees gain only 40% of the time. At the same time, October usually sees markets pick up: historically it has returned 0.25%, on average, with rises occurring 60% of the time.

Again, however, don’t be too quick to base your bets on such trends. As veteran stock picker Ken Fisher noted in a recent Money Observer article:

"Averages aren't predictive. Nor are any of these months uniformly positive, negative, up big or whatever else. July has great average returns but was negative in 35 of 89 calendar years since 1928. Yucky September rose 51 times.

"How can you tell the good Septembers from bad ones before they start? You can't! Stocks are too volatile in the short term. September could easily rally during a bear market or flop in a bull."

See the table below for whether the adage worked in past years:

Investors were wrong to sell in May – has the old adage had its day?

This article was originally published on our sister website Money Observer.

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