When stocks are near their highs and sentiment is bullish, summer months outperform
‘Sell in May and Go Away’ is the popular seasonality adage for investors, because stocks supposedly fare so much worse in the six months from May through October compared to the other six months of the year (November through April). The table below summarizes the S&P 500 index (SPX) returns for these two periods going back to 1988.
Since 1988, the SPX has averaged a return of 6.61% from November through April, but for the upcoming May through October period, the index has an average return of just 3.27%. The percentage of positive returns is very close for the two periods. The reason for the underperformance starting in May has been because when the market was up, it was up less than in November through April, and when it’s down, it’s been down more.
This adage, however, is becoming outdated. The May through October period has been closing the gap recently on the November through April period. Last year, the SPX rose over 20% during the ‘Sell in May’ period and lost 2.4% in the six months prior to May. In fact, May through October has gained double digits in four of the past six years.
Breaking it Down
Let’s start layering in factors from the current market environment and see if anything changes. The first thing I thought to be relevant is that the SPX sits near its all-time high. Forget about ‘Sell in May.’ When the SPX enters May this close to all-time highs, it averaged a return of 6.1% over the next six months, with 85% of the returns positive.
Another data point I thought might be relevant is a measure of sentiment amongst investors. The weekly sentiment survey from the American Association of Individual Investors (AAII), which we have data since 1988, asks members where they think the market is going over the next six months. The most recent poll showed those bullish on the market overtaking those bearish for the first time in ten weeks. I used an eight-week average of the poll and by that measure, there’s more bears than bulls.
The table below shows the average return of the SPX has been a little above 3% over the next six months no matter what this poll says. When the eight-week bulls minus bears has been negative, however, the returns have been significantly more volatile. In these cases, the average positive and average negative has been in the double digits.
Since 1988, there were just two times both factors above were true. Both times, stocks did well over the next six months. In 2017, the SPX gained 8% from May through October. In 2013, the index gained 10% over those six months.
With these factors in place and given the index returns for May through October since 2020 seen in the first section, I think we can disregard the ‘Sell in May’ principle this year.
