Sell In May & Go Away: A Review of the Strategy

The "Sell in May and Go Away" strategy is a popular market adage suggesting that investors should sell their stocks in May and reinvest in bonds until November, avoiding the perceived volatility of the summer months. While this strategy is one that many have possibly employed over the decades, it has likely led to a greater level of missed opportunities during the summer months than savings of return erosion. If one would have enacted this plan in May of 2024, adhering to this strategy would have likely resulted in missed opportunities as we will discuss later.

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As we enter the early stages of the 4th Quarter of 2024, we felt that it is important that we look back on past data points to help establish a pattern of why this is not such a great strategy to employ annually.

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Historical Perspective:

1. On average, the S&P 500 has gained ~3% from May to October from the years 1990-2023 (Note that we do not have the data for 2024 compiled in full at this time).

2. The average from November to April from 1990-2024 has been 6.3%.

3. Note that if we take this information back to 1930 through present, we see a tighter spread of 3% and 4.5% for summer and winter months, respectively.

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Yes, there is a noticeable difference in the returns for both timeframes, but they are both positive and have experienced periods where returns in the summer months far outweighed those of the winter months.  In addition to this data, elections tend to influence the markets during the May-October timeframe. According to Ed Clissold w/ Ned Davis Research, the S&P 500 has risen 78% of the time from April 30 to Oct. 31 in presidential election years. That compares with about 64% for nonpresidential election years in the same period. As you can see, there is historical data showing that remaining invested in the market is optimal when it comes to building Financial Peace of Mind.

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Now that we have looked at historical data, let’s discuss what would have happened had you decided to exit the market in May.  For those that remember, April was marked by increased volatility in the markets as inflationary concerns weighed heavily on the markets. There was likely a great deal of profit taking post the runup that we experienced in 2023 and early 2024.  The increase in volatility may have made many question whether they should exit the markets and park the funds in cash or a cash equivalent until post the summer months and/or Presidential election. If one chose that path, they would have missed out on a strong period from May through the end of September 2024 (despite pockets of market volatility).

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Several factors contributed to the positive performance of the stock market in May and subsequent months of 2024:

1. Favorable Economic Indicators: The US economy continued to demonstrate resilience, with positive signs in areas such as job growth, consumer spending, industrial production, and inflation. We continue to see signs that the inflationary pressure is lessening, but we are seeing signs of a slowing labor market which is one of the reasons that we witnessed the FOMC recently cut the Fed Funds Rate by 50 bps to help stimulate parts of the economy.

2. Strong Corporate Earnings: Many companies reported robust earnings in the second quarter of 2024, boosting investor confidence and driving stock prices higher. Many in the technology space continued to provide the lion’s share of the gains, but they were joined by companies that have been quiet over the past 18-24 months (e.g., small- and mid-cap value names).

3. Low Interest Rates: The FOMC has held steady at an effective rate of 5.375% for several months, but they determined at the September meeting that the environment was ready for a 50 bp cut (noted above).  This has started to flow through the market in a meaningful way as we are seeing reductions in lending rates, mortgage rates, etc. In addition, we are also seeing an increase in valuations. When interest rates are lower, the discount rate used to value future cash flows is also lower. This means that future earnings are worth more in today's dollars, which can increase stock valuations -> one reason we are seeing smaller- and mid- capitalization names gain some steam to the upside.

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If one would have sold out of stocks in May, they would have missed the significant gains that occurred during the summer and early fall of 2024. For example, from 5/1/2024 through 9/30/2024, the S&P 500, Nasdaq, and DJIA appreciated 14.25%, 15.24%, and 11.33%, respectively. By missing the key return months, you would have negatively impacted the compounding of returns while potentially generating tax implications in non-qualified accounts. As we have noted many times in the past, remaining fully invested is one of the keys to building and growing your financial wealth and Financial Peace of Mind. While the past is not prologue, there are key data elements that can be garnered from the information. There were times historically where this strategy worked out, but we believe the data shows that remaining invested over the longer term is the best way to allow your money to grow through compounding.

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As always, if you have any questions, we encourage you to contact your trusted financial advisor.  We hope that you are having a great start to the fall and look forward to speaking w/ you again soon.