(News Bulletin 247) – As with the approach of each month of May, the stock market favorite adage “sell in may and go away” resurfaces. Historical data reveals that the best-performing period, on average, runs from November to April. Hence the injunction that investors should “sell in May and leave” – and come back in November. Should we follow this venerable adage to the letter? Not so sure according to specialists.

The Stock Exchange is perceived as a complex universe to grasp for the average person with its very animalistic jargon and its convoluted mechanisms. This universe has been enriched with many sayings and proverbs as mentioned in this previous article. We can for example cite “better to cut off a finger, than a hand, and a hand than an arm”, or “buy the rumor and sell the information”.

And among these injunctions which are the folklore of the Stock Exchange is the famous sell in may and go away or “sell in May and go away” in the language of Molière. The earliest mention of this saying was found in a 1935 edition of the FinancialTimes, the article already presenting it as “an old adage”. The most likely hypothesis would be that the wealthy classes left London for the countryside on sunny days, leaving their wallets behind (or at least only intervening occasionally during this period).

It is therefore believed that it is advisable to abstain from the stock market from May 1st before reinvesting from the eve of November 1st and therefore on Halloween day. This last day also has its effect on the markets. It’s the Halloween effect or “Halloween effect” in French” which implies that the period from November to April offers the greatest upside potential in the financial markets.

And as we approach this fifth month of the year, the question naturally comes back to the fore. And even more after a month of April (until a few days ago) deemed “counter-intuitive” with indices rising despite an accumulation of bad news, for John Plassard, investment advisor at Mirabaud.

“Risks of recession, drop in economic statistics in the United States and in certain regions of Europe or even (beginning of) a banking crisis of rare violence, all the signals were green (or rather red) for the indices to fall. strongly, but yet it is the increase that should prevail”, was surprised the specialist in a note published at the beginning of the week. John Plassard is wondering whether to “leave” the market in the face of recent records for certain indices, including the CAC 40 in Europe. Moreover, the Parisian index has just closed the month of April up 2.3%, bringing to 15.7% its increase since the beginning of the year.

Bask in the sun rather than buy

Several factors tend to validate the “sell in may and go away” theory. Two academics, specializing in seasonality issues, tested the “Halloween/sell in may” effect on the largest sample ever collected, and their conclusion is clear: investing on Halloween and taking profits in May brings in 4% more than a strategy of holding its securities indefinitely.

Professors Zhang Yi from Nottingham University Business School (China) and Ben Jacobsen from TIAS Business School (Netherlands) selected a sample that begins in 1693 with the London Stock Exchange and includes until the most recent of the indices, that of the Rwandan market inaugurated in 2013, i.e. 114 markets in total and more than 63,000 months of stock market performance to dissect… And the result is surprising in its magnitude since they have identified only one market – the Mauritius- showing a superior yield over time during the summer period

Zhang and Jacobsen’s study assumes that this effect corresponding to the taking of summer holidays is still at work today. Especially since the seasonality of the Halloween Indicator is more marked in Europe and the United States, where the habit of taking vacations in the summer is more widespread than in the rest of the world.

The desertion of investors during the summer is a factor which is also raised by John Plassard, who recalls that “the market tends to experience its weakest months during the summer due to the low volume of trading”. He also mentions a seasonality of investment flows, linked to the payment of end-of-year bonuses from financial industries and companies, “the deadline for filing tax returns in the United States in mid-April may contribute to this “.

“In the Singapore market, most companies pay dividends in May and June of each year. Investors looking for dividends may therefore seek not to buy shares after these months until opportunities for decline occur” adds John Plassard.

The specialist supports this seasonality in the performance of stock market indices by recalling the behavior of the S&P 500 over the past 30 years: “From 1990 to 2022, the return of the S&P 500 was around 2% from May to October, while that of November to April was around 7% on average.” And adds that the Dow’s average gain over the past 10 years for the November-April period was 27.5%, compared to an average of 2.9% for the May-October periods that followed.

Historical data therefore tends to validate the veracity of this adage, recalls the specialist. Hence the saying that investors should “sell in May and walk away” – and come back in November. However, John Plassard wishes to qualify these verifications. “So there is some truth to the adage that May sees the first correction of the year on average, but July is historically one of the best of the year,” says- it is worth.

A flawed theory

Like any theory, this one has flaws. “Most often stocks tend to make gains throughout the year, on average, and so selling in May doesn’t usually make a whole lot of sense,” John Plassard said.

“History shows that the opportunity cost of periodically exiting and re-entering the market can be significant. Additionally, the ease of tracking your investments (compared to decades ago when this theory of the calendar was created) means that it is possible to monitor the market more easily and to make changes to your investments if necessary at any time of the year”, he continues.

Especially since calendar market trends such as “sell in May” do not take into account the uniqueness of each period. The economic cycle and the mood of the market at the time can play spoilsports. John Plassard warns investors who strictly follow stock market trends, without taking into account other factors such as the economic context or the investment objectives and risk constraints specific to each profile.

Even if these stock quotes “are often exaggerated”, the specialist believes that there are “many lessons to be learned”. According to him, the latter could help to better interpret this second part of the year and “dissipate some clouds of the beginning of the year”. He also recalls that it is appropriate to observe the evolution of the market in the medium and long term, an advice which “will make it possible to remove a certain stress”.

In summary, should you “sell in May and leave”? “Probably not, based on historical data, because there may be better options if you are an active investor. If you are a long-term investor, more important factors should influence your investment decisions” , would like to remind Fidelity for its part.