Why investors should ignore the old Wall Street adage “Sell in May” – fr

Why investors should ignore the old Wall Street adage “Sell in May” – fr

The Wall Street Bull, located in the financial district of New York.
Mike Roy | MCT | Service de presse Tribune | Getty Images
The “sell in May and go” strategy isn’t getting much love on Wall Street this year.
Market professionals agree that history makes it clear that the strongest six-month period in the market is from November to April, but they also say that this is not necessarily a factor that should shape investors’ plans over the course of time. of a year.

“Any investment strategy that you can sum up in a rhyme is probably a bad strategy,” said Jonathan Golub, chief US equities strategist at Credit Suisse. Golub raised its S&P 500 target to 4,600 year-end on Friday from 4,300 on strong earnings.

He said that, on average, the market’s performance follows the pattern of weakness between May and October, but that is no reason to exit stocks.

“It would be perfectly reasonable if every May looked like May of the previous year,” Golub said. Just comparing this year to last year shows a huge contrast.

“In May of last year, the market was bottoming out. He said the backdrop had totally changed from a country and economy plagued by pandemic last year to a time when a booming economy and profits are expected to generate. new gains.
“Look at what we have this season of results. US companies exceed estimates by 22% – 22% is unknown. The economics are phenomenal, ”Golub said.

The second quarter is expected to be even stronger, and those earnings reports will be released in July.

“I don’t sell in May and I wouldn’t advise anyone to do so,” Golub said. “I think the biggest mistake you can make in a market like this is being too cute and going out too early. It is better to try to stay a little longer than to go out too early. “

Top of the market?

A view of the New York Stock Exchange building on Wall Street in downtown Manhattan in New York City.

Roy Rochlin | Divertissement Getty Images | Getty Images

Carter Worth, chief market technician at Cornerstone Macro, agrees investors generally wouldn’t be well served to exit the market in May and stay in October through October.

But this year, he expects the market to enter a period of weakness. Worth said that seasonal factors aside, he expects the market to lead.

“It’s time to reduce exposure. Intermediate summits can last from three to five months, ”he said.

Worth studied the seasonal trend and found that the 27.8% performance of the Dow Jones from November 1 to April 30 was the fourth strongest for this six-month period dating back to 1896.

“After particularly good six-month spells from November through April, the next six months are lackluster,” Worth said. He added that this could be the case for any six month period after a strong gain in stocks.

The average gain for the Dow in the first 10 years for the period from November to April was 27.5%, compared to an average of 2.9% in the following periods from May to October, Worth found. The average overall gain for the whole year over the best 10 years from November to April was 23.7%.

For all years back to 1896, the average return for the Dow was 5.2% from November to April and 2.1% from May to October, according to Worth’s analysis. The average performance for all years was 7.3%.

Even though Worth expects the market to have found a near-term high, he said the seasonal investing strategy was the wrong approach.

“The six month period from November to April offered higher returns than the six month period from May to October 1896 to 2020,” he said. “But the best strategy by far, as everyone knows, is to keep the capital exposed to the market year after year. “

Worth calculated that $ 1 million invested in the market from November to April, dating back to 1896, by investors who then went in cash from May to October, would have brought in $ 164.4 million.

Investors who stayed all year would have a return of $ 672.6 million on that original $ 1 million.

A trend for a summer rally

The pattern of seasonal weakness from May to October is also clear in the S&P 500, but the average return has been positive 66% of the time since 1928, according to Stephen Suttmeier, technical research strategist at Bank of America.

He said that since the index had an average positive return of 2.2% for that six-month period, the “sell in May” strategy “leaves a lot to be desired”.

Suttmeier said his study confirms a trend for a summer rally, and the May-October period drop is “loaded in the background.”

“Instead of ‘sell in May and leave’, we should ‘buy in May and sell in July / August’,” he wrote in a note. “Monthly seasonality suggests selling during the strong month of April, buying the weak month of May without risk, and selling from July to August, before September, which is the weakest month of the year. “

The summer rally may be even stronger in the first year of a new president’s tenure, with a strong market in April and July, but also with a strong comeback in May, Suttmeier noted.

“This gathering from spring to summer and the correction of autumn are amplified during the first year of the presidential cycle with an increase from April to June of 5.5% on average and from August to October of 2, 4% on average, ”he writes.

Any investment strategy that you can sum up in a rhyme is probably a bad strategy.

Jonathan Golub

Chief American Equities Strategist at Credit Suisse

Sam Stovall, chief investment strategist at CRFA also looked at the “sell in May” phenomenon, through the performance of the S&P Equal Weight 500. This index gives each stock an equal weight rather than the market cap weight of the S&P 500 index.

Until April 30, the S&P Equal Weight 500 Index was up 16.2% for the year, its third strongest four-month start since the index’s inception in 1990.

“Investors are now wondering if this benchmark of unweighted US large-cap stocks has gone too far, too fast,” Stovall wrote in a note.

He said history shows that such early strength is usually followed by a period when the market digests gains in May. The market can be volatile until September before an above-average gain in the last three months of the year.

With all the emphasis on “sell in May and go,” investors should know that the story of the adage might have more to do with the holidays than the stock market bailout.

“The phrase ‘Sell in May and go’ comes from an English saying: ‘Sell in May and go, and come back on St. Leger’s Day,’” said Cornerstone Macro’s Worth.

The feast of St. Leger refers to St. Leger’s Stakes, a thoroughbred horse race held in mid-September.

“It refers to the custom of leaving the city of London so that the countryside escapes the hot summer months,” Worth said.

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