Should you ‘Sell in May’?

“Sell in May and go away, and come on back on St Leger’s Day.”

“Sell in May and go away, and come on back on St Leger’s Day.”

This well-worn expression refers to the time when Britain’s wealthy citizens used to leave London during the hot summer, returning in mid-September. That’s when the St Leger, the last and longest of the UK’s annual ‘classic’ flat races for three-year olds, is run at Doncaster racecourse.

Nowadays, when people advise you to Sell in May, etc., they mean that you should get out of the stock market for the next few months.

I can’t help you on who might win the St Leger – try my colleague Matt Houghton at Betting Rant for that.

But while selling in May sounds almost too simplistic…if you’re an equity investor, you’re still faced with the big question: is it a good plan to dump your stocks now?

At first glance, history supports the case for selling – or at least for not buying.

Stock indices do tend to struggle during the summer months. Take America’s Dow Jones Industrial Average. Since 1950, this has risen by an average of just 0.4% between the start of May to end-October, according to the Stock Trader’s Almanac, versus a 7.5% rise from November through to end-April. Analysis from Nautilus Research also suggests that shares get volatile over the next couple of months.

With US stocks driving equity markets around the world, that’s an important point for UK investors to note.

As ever with the stock market, though, it depends on whom you listen to.

For many years Sam Stovall, chief investment officer at research firm CFRA, has been asked by clients if they should sell in May, reports the FT. So he’s turned his advice into an index.

Stovall’s conclusion is that you shouldn’t sell out at the start of May. The US stock market still tends to rise over the summer, just by less than it does during the winter.

The last 12 months have presented a similar pattern to many previous years. The S&P 500 index is up by 12.1% since the start of November 2016, according Stovall’s data. Yet in the six months from the end of April to end-October 2016, the index still managed to climb by 2.9%.

Indeed, the S&P 500 averages since 1970 have been +8.7% for the winter half of the year and +2.8% for the summer’s six months. Investors appear to have been warier over the summer, says the FT, as safer ‘defensive’ stocks have tended to outperform cyclicals. But as these figures show, you’ve still made money by being in the right shares between May and October.

What about even further back? Using monthly data since 1900 (provided by Dr. Robert Shiller), Lance Roberts via has been looking at May by itself. Historically, this has been only the 4th worst-performing month for shares, with a positive average return of +0.26%.

Enough stats. The simple conclusion from these is that shares go up all the time, though they rise faster in winter than during the summer.

But wait. All these data don’t reflect absolute market levels.

In other words, let’s forget history for now. If shares are standing around their all-time highs, as they are today, what’s likely to happen next?

On this topic, I’ve already set my stall out very clearly here, here and here.

I believe that an equity bubble is forming and that this is a time to be very cautious of stock markets. In particular that applies to the US but it also includes the UK.

If you compare your portfolio’s upside scope with its potential downside risk, at current levels I’m sure you’ll agree there’s much more of the latter. Put another way, at the moment I reckon you need to have very good reasons to hold individual shares. Even then, these are likely to fall back if the mainstream indices retreat.

As I’ve shown above, dumping shares in May hasn’t always been a great plan. But this year, selling some of them could be a very good idea indeed.

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