"Sell in May and Go Away" – Not Good Advice in Canada.
You might have heard of the old adage “Sell in May and go away”. In other words, the market would drop during the summer so the safe thing to do would be to sell your equities in May, take the summer off and then buy them back again at the end of the summer.
I did some research on this and the Globe actually published an article in 2017 that addressed this issue and they concluded that the saying was a myth and you shouldn’t actually sell in May. They cited a US study from EquityClock on the S&P 500 index using May 5 as the sell date and October 27 as the buy date over 66 years.
They found that that average return during the summer was .20 percent (almost zero). They also cite another shorter study of the past 20 periods, this time using October 15 as the end date and found that on average, there was a loss during the summer period.
Based on this later study, the “Sell in May and go away” seemed to be a good thing to do. Based on the first study, at least you could say “Hold in May and go away” – if you were to just hold your equities during the summer, you wouldn’t miss any gains. So I was puzzled about why the Globe would say that the saying was a myth – perhaps that was just the title to get you to read because they later say there was a “grain of truth” in the expression.
So, I set out to do my own analysis, this time using Canadian data. I pulled the S&P/TSX composite back to 1979 and looked at the period from May 5 to October 27 compared to the period from October 27 to May 5 (when there was no activity on those dates I just used the closest date.
The average annualized return for the October to May period was 16% while the average annualized return for the May to October period was -1% (similar to the first study mentioned). Therefore, over the past 40 years, taking the summer off (“Hold in May and go away”) would have been a good strategy. Selling and rebuying at the end of the summer would have achieved you nothing (except some fees).
At the end of the day, it could be that the “Sell in May and go away” expression was created by the Investment Bankers themselves who were looking to justify taking the summer off (in the good old days when people routinely took long summer vacations). Then it became a self fulfilling prophesy since if the Investment Bankers were off on vacation and not trading, there would be less demand in the market and prices would stay flat. But, if history is your guide, then “Hold in May and go away” seems to be the correct statement, so enjoy your summer!
Of course, we can’t predict the future based on history. I should tell you that in the last 8 years, the returns from October to May averaged 6% while the May to October returns averaged 3%. This removes the 84% (Annualized) loss that happened in the summer of 2008 where the index was at 14,274 on May 5, and 8,537 on October 27. That would have been the year that you really did need to “Sell in May and go away”!