(News Bulletin 247) – As every May, the stock marketers’ favorite adage “sell in may and go away” resurfaces. Historical data reveals that the best performing period, on average, is from November to April. Hence the injunction that investors should “sell in May and leave” and then return in November. Should we follow this venerable adage to the letter? Not so sure according to specialists.

The stock market is perceived as a complex universe to understand for the average person with its very animalistic jargon and its convoluted mechanisms. This universe has been enriched with numerous sayings and proverbs as mentioned in this previous article. For example, we can quote “it is better to cut off a finger than your hand, and your hand than your arm” or “buy the rumor and sell the information”.

And among these injunctions which make up 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 oldest mention of this saying was found in a 1935 edition of Financial Times, the article already presenting it as “an old adage”. The most likely hypothesis would be that the wealthy classes left London for the countryside in the good times, abandoning their wallets (or at least only intervening sporadically during this period).

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

A stock chestnut tree

And at the beginning of May, the question naturally comes to the forefront. Especially after a month of April when the CAC 40 lost 2.69%, showing its first monthly decline since October 2023.

“Intensification of geopolitical risks, questions about the number of rate cuts by the Federal Reserve in 2024, potential arrival of Donald Trump to power in the United States, specter of stagflation or other, doubts about the sustainability of market resistance has increased after a smooth increase since last November”, lists John Plassard, investment advisor at Mirabaud, in a note published at the beginning of the week.

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 yields 4%. more than a strategy consisting of holding one’s securities indefinitely.

Professors Zhang Yi of Nottingham University Business School (China) and Ben Jacobsen of TIAS Business School (Netherlands) selected a sample which begins in 1693 with the London Stock Exchange and includes up to the most recent index, that of 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 scale since they only identified one market – the Rwanda Stock Exchange. Mauritius – presenting a higher yield over time during the summer period

Zhang and Jacobsen’s study assumes that this effect corresponding to taking summer leave 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 summer is more widespread than in the rest of the world.

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

“In the Singapore market, most companies pay dividends in May and June each year. Dividend-seeking investors may therefore look to hold off on buying stocks after these months until dividend opportunities arise. declines present themselves,” adds John Plassard.

The specialist supports this seasonality in the performance of stock indices by recalling the behavior of the S&P 500 over the last 30 years: “From 1990 to 2023, the return of the S&P 500 was around 2% from May to October, while that of November to April was about 7% on average. And adds that the average gain for the Dow over the past 10 years for the November-April period was 27.5%, compared to an average of 2.9% for the subsequent May-October periods.

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 then come back in November. John Plassard, however, wishes to qualify these verifications. “There is therefore some truth in the adage that the month of May on average sees the first correction of the year, but the month of July is historically one of the best of the year,” says it is worth.

Especially since calendar stock market trends such as “sell in May” do not take into account the unique nature of each period, particularly in this election year in the United States.

John Plassard recalls that the S&P 500 tends to perform well over the period from May to October during years marked by the American presidential election, since it progresses “in 78% of cases since 1950”.

“After a strong start to the election year, the American stock market tends to regain its momentum towards the end of the second quarter and generally continues to show good performance until the end of the year,” notes -he

A theory with flaws

Like any theory, this one therefore has flaws. “More often than not, stocks tend to record gains throughout the year, on average, and so selling in May generally doesn’t make much sense,” recalls John Plassard.

“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 calendar has been created) means it is possible to more easily monitor the market and make changes to your investments if necessary at any time of the year,” he continues.

The economic cycle and the current market mood can play spoilsport. 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 market adages “are often exaggerated”, the specialist believes that there are “many lessons to be learned from them”. According to him, these sayings could help to better interpret this second part of the year and “dispel some clouds at the start of the year”. He also reminds us that it is appropriate to observe the evolution of the market in the medium and long term, advice which “will help to remove some stress”.

Moreover, in a post with a humorous tone, Deutsche Bank strategists also deconstruct this stock market myth which has a tough skin. And the conclusions of the German bank’s specialists are clear: “You can sell in May, but you could just as easily flip a coin and your chances of success would be the same”, joke the German bank’s strategists.

“We prefer to follow a more fundamental approach and do not recommend investing based on historical models,” they agree.

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 also like to remind Fidelity for its part.