“Sell in May and go away”—let’s study this seasonal trade strategy

Sell in May and go away is one of the most well-recognized seasonal trade strategies—you sell your equity portfolios on or shortly after May 1, then buy back those stocks after October 31. But is this a sound investment strategy for good returns?

In general, life is unpredictable. However, within our unpredictable lives, there are aspects that we can count on regularly, which includes Christmas holiday music starting in early November (or is it September now?), parents counting down the days until school starts, and in the spring, the dread of filing our taxes.

In the May financial world, it can be guaranteed that major financial networks will publish “Sell in May and go away” articles, and as a result, we’ll receive countless questions regarding the validity of this seasonal trade.

Sell in May and go away, also known as the “Halloween indicator,” is one of the most well recognized seasonal trade strategies. It theorizes the strategy of investors selling their equity portfolios on May 1, allocating the proceeds into cash, and then buying back those stocks again after Halloween.

While the origins of Sell in May and go away are unknown, it’s rumored to date back to old England, when stockbrokers would go on summer vacation in May and not return until September. The original saying was, "Sell in May and go away, do not return until St. Leger's Day." The final horse race of the season happened on St. Leger's Day and the old-time stockbrokers didn't bother getting back to work until the racing season had ended.

Sell in May and go away has gained credibility among investors, given the number of infamous stock market declines that have occurred during the May through October period, including Black Monday in 1987, the post-Lehman Brothers crash of 2008, and the correction in August 2011 that followed the downgrade of the U.S. government debt rating.

International, Canadian, and U.S. equities—as measured by the MSCI EAFE Index (USD), S&P 500 Index (USD), and S&P/TSX Composite Index (CAD)—were all positive, with a price return of 10.3%, 8.6%, and 6.5% respectively at the end of April. The strong rally in risk assets year-to-date, despite a slowing global economy and challenging central bank policy, has investors asking whether it may be prudent to reduce risk.

We analyzed returns for a portfolio that adhered to Sell in May and go away relative to a conventional buy-and-hold strategy. What we found was as expected, that investors are much better off with a buy-and-hold strategy over the long run, as the table below highlights. Over the shorter periods, the performance is extremely inconsistent.

Buy and hold investment strategy vs Sell in May and go away
This table that compares a conventional buy-and-hold investment strategy to the “Sell in May and go away” strategy over a 10-year, 20-year, and 50-year period. The buy-and-hold strategy performed better in all periods.

Source: Bloomberg, Manulife Investment Management, Capital Markets Strategy, as of April 28, 2023.

In the chart below, a Sell in May strategy would be successful if the bars were negative most of the time. However, there’s no identifiable pattern in the data for a Sell in May strategy. In fact, Sell in May has underperformed recently. Of the past 10 years, 80% of the time, returns from May to October were positive, with an average return of nearly 5%.

S&P 500 Price Index performance (May – October)
This chart shows the performance of the S&P 500 Price Index between May and October, from 1973 to April 2023.

Source: Bloomberg, Manulife Investment Management, Capital Markets Strategy, as of April 28, 2023.

We believe many of the misperceptions regarding Sell in May and go away revolve around behavioural biases. The field of behavioural finance has shown that investors weigh negative returns far greater than the positive returns and are much more likely to remember negative outcomes. Since 1950, approximately 60% of negative monthly returns, including corrections of greater than –10%, occurred during the May to October period, which helps add credence to the Sell in May strategy.

When it relates to investors with a long time horizon, their returns would likely benefit from remembering this quote from Nobel Laureate, Eugene Fama:

“Investing is like soap; the more you touch it, the smaller it gets.”

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Macan Nia, CFA

Macan Nia, CFA, 

Co-Chief Investment Strategist

Manulife Investment Management

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Kevin Headland, CIM

Kevin Headland, CIM, 

Co-Chief Investment Strategist

Manulife Investment Management

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