Is “sell in May and go away” a good – and even relevant – investment strategy? That is the question many seasoned investors are asking themselves as the fifth month of 2023 approaches.
The old adage – which has been around for more than a century – suggests selling off stocks during the May to October period when market performance is supposedly low and then buying back in from November to April.
In Australia, May also marks the start of the traditional “confession season” for ASX stocks, following the conclusion last night of the quarterly reporting period. This season usually gets going with companies “confessing” during their attendance at Macquarie Group’s Australia Conference, which this year kicks off on Tuesday.
But back to the “sell in May” adage.
First observed in England at the turn of the 20th century, the trend has been witnessed in various global markets since. This has extended to the Australian market, too, with trading often plateauing in May.
And even though capital markets investors are historically a superstitious lot and seek seasonal trends, maybe investors would be better advised to “ignore the rhyme, all the time”.
The history of the “sell in May” adage, according to US investment adviser and author Kent Thune writing for Seeking Alpha, is rooted in some of the worst stock market crashes in history, which occurred in October, including the Wall Street Crash of 1929 and Black Monday in 1987. In the decades since then, stock market returns have averaged mostly lower from May through October, compared to November through April.
And Thune quotes the following historic examples, focused of course on the US market but therefore the bellwether for what happens on the ASX:
- The three worst days for performance in stock market history occurred in October, two of which were during the crash of 1929, and the other was the 1987 Black Monday crash.
- From 1990 to 2022, the US key index S&P 500 returned about 2 per cent from May through October, while November through April averaged about 7 per cent.
- A 1998 study published by research network SSRN found that selling in May and staying away through October held in 36 out of 37 developed and emerging market economies from 1970-1998.
- A 2013 publication in the Financial Analysts Journal noted that selling in May persisted from 1998 to 2012.
- The period from 2013 has not been as consistent, especially considering the sharp reversal of the trend in 2020 when the S&P 500 index jumped 46 per cent in price from March 23 to November 1 of that year.
Many theories used to explain the trend have been put forward over the years, including the notion that the warmer weather and summer activities in the northern hemisphere – read, US and European capital markets that dominate global trade – distract investors, causing the stock market to perform poorly. However, come the northern hemisphere winter when the distractions (and sun) are gone, the market performs better.
Good weather or not, this year another factor may influence global investors’ decisions and therefore provide some guidance for investors on the ASX.
Nigel Green, CEO of independent financial advisory, asset management, and fintech organisation DeVere, this week warned of potential interest rate hikes in May by US, UK and European central banks.
“This is likely to cause jitters in the market as some investors, concerned about short-term profits, will move into panic-selling mode,” Green told financial news sites including Professional Para Planner.
It is less likely that Australia will see another rate rise from the RBA next week, with three of the four big banks expecting the Reserve Bank to leave the cash rate unchanged at 3.6 per cent. Instead, tax loss selling ahead of the end of the financial year and reporting season is more likely to influence any investor selling in May across the ASX.
Goldman Sachs analysts Matthew Ross, Bill Zu and Tony Wu noted that margin forecasts across all 10 industrial sectors for the second (ie current) half of the 2022-23 financial year had been downgraded. They said they expected this pattern to continue as the market entered the May/June “confession season” as firms revise their full-year guidance to reflect 3Q trading activity.
“While analysts have already revised margin forecasts lower across the board … there are still a number of stocks where consensus forecasts imply a strong improvement in margins that might be challenging to deliver in the current environment,” the Goldman Sachs analysts said in a note to clients.
While there is potential that the ASX will next month follow the downward trend of “sell in May’, it is important to remember that historical trends do not perfectly predict future outcomes.
The only thing past data guarantees is the past.
Savvy investors might need to look beyond nursery rhymes and consider the bigger picture before making any decisions on whether to hold, sell or buy in coming weeks and months.