Debunking a seasonal anomaly
Divesting one’s equity holdings in the warmer months of May to November and reinvesting them in November to May, seems to be yielding fewer and fewer benefits.
While it’s true that U.S. equities have historically underperformed in the period of May-November as investors cash out for the summer, technological advancements such as algorithmic trading and access to smartphones are making it harder for investors to fully distance themselves from markets over the warmer months of the year.
In fact, the magnitude of the seasonal outperformance in November to May, notably over the last 5 years, has declined substantially (see the table below).
Magnitude of outperformance in November-May has decreased substantialt over last five years
| Period | Average return S&P 500 Index (November-May) | Average return S&P 500 Index (May-November) | Magnitude of outperformance |
|---|---|---|---|
| 20-years | 4.52% | 0.49% | 4.03% |
| 10-years | 8.76% | 4.20% | 4.56% |
| 5-years | 5.15% | 4.14% | 1.00% |
1. Source: Clement Thibault, Investing.com, May 2019, Fact Check: Sell in May and Go Away?
Does going away really change much?
Investing $10,000 in the S&P 500 in November 1998 and holding onto the investment until May 2019 would have yielded $26,812. In contrast, investing $10,000 in the S&P 500 in November 1998 and selling in May and going away every year until May 2019, would have yielded only $27,735.1
*Selling in May and going away” yielded only $923 more over a 20-year period.
Factor in transaction costs and capital gains taxes, and the excess gains attributed to the “Sell in May and go away” strategy are quickly wiped out.
Performance in May-November has historically been positive
Though equities have historically performed better in November-May, it doesn’t mean market performance in May- November has been negative. On average, the S&P 500 has yielded positive returns on a 20-year, 10-year and 5-year basis. As such, liquidating one’s investments for in May may translate to miss opportunities.
Key takeaways
Regardless of the day, month or season, volatility is a new reality that investors need to grow accustomed to when managing their portfolios. Investing for the long-term is therefore one of the best ways to avoid the short-term fluctuations that impact one’s portfolio from time to time. After all, with a long-term approach to investing, an investor need not worry about seasonal tendencies, brief market corrections or missing out on the next big opportunity!
1. Source: Clement Thibault, Investing.com, May 2019, Fact Check: Sell in May or missing out on the next big opportunity!