“Sell in May and go away” isn’t as useful as it once was
Summary
Returns still tend to be better for those who heed the Wall Street adage, but volatility has been greater outside of the summer months in recent yearsOne of the oldest adages on Wall Street—“sell in May and go away"—has held that it is in investors’ best interest to sell their stocks at the beginning of May and return to the market at the start of November.
But does that have any validity? Actually, yes, but not as much as it once did.
To study the accuracy of this axiom, also known as the Halloween indicator because it suggests buying stocks right after Oct. 31, my research assistants (Keya Patel and Amir Murad) and I pulled all data on various stock classes going back to the 1950s. These groupings were U.S. growth stocks, U.S. value stocks, large- and small-cap U.S. stocks, and international stocks.
With these groupings, we then looked at two periods: before 2000 and after 2000 through 2023. And within each of these date ranges, we looked at average returns and volatility for the period from May to October versus the rest of the year (from January to April and November to December).
Those who heeded the advice saw especially strong results in the 20th century. For instance, for large-cap stocks between 1950 and the end of the century, investors who held stocks outside of the May-to-October period saw an annualized return of 19.62%. Over the time frame, large-cap stocks held during the May-to-October period delivered an annualized return of 6.72%. This is a difference of 12.90 percentage points on an annualized basis.
What’s more, this outsize performance came with less risk. The average volatility of large-cap stocks outside of the May-to-October period was 12.44% from 1950 to 1999. But the average volatility during the May-to-October period for large-cap stocks was 14.14%. This means holding stocks over the summer/fall months yielded lower returns with higher risk—exactly in line with the adage.
Jumping to the 2000 to 2023 time frame, we see similar, if diminished, returns. But the risk increases.
For instance, investors who held stocks outside the May-to-October period earned an annualized return of 13.29%. Over the same time frame, investors who held large-cap stocks during the May-to-October period could expect an annualized return of 8.64%. This is a difference of 4.65 percentage points on an annualized basis—a positive return but nowhere near as good as in the 20th century.
When we turn to volatility, we see that the summer/fall months no longer are the riskier ones. During the period outside of May to October, the average volatility of large-cap stocks was 17.50%. But the average volatility of large-cap stocks during the May-to-October period was 14.31%. This means holding stocks during the May-to-October period yielded lower risk compared with the rest of the year.
Results were similar across all stock styles investigated.
In all, it appears that there is still some truth to “sell in May and go away" in the 21st century as you can indeed score higher returns by selling before summer starts and going away until after Halloween. But heeding the advice now comes with greater risk.
Derek Horstmeyer is a professor of finance at Costello College of Business, George Mason University, in Fairfax, Va. He can be reached at reports@wsj.com.
