Turn Your Back on This Faulty Market Wisdom By Sean Michael Cummings, analyst, True Wealth You've likely heard the market adage "sell in May and go away." The saying stems from seasonal factors in the U.S. stock market... First, investors tend to take vacations between May and October. In theory, trading slows down during the summer months... and stocks start to slouch. Second, markets tend to favor the winter. The so-called "Santa Claus rally" often appears around the holidays, as investors cash their bonus checks. These factors can skew your returns. Many traders want nothing to do with the market in summer as a result. They simply sell their holdings and leave. But this year, I suggest you ignore this advice... The "sell in May and go away" crowd was just proved dead wrong. Stocks soared 5% last month – making it one of the greatest May rallies in a century. And based on history, that momentum will continue well beyond the summer months... The May-through-October period has earned its reputation as a gloomy time for stocks... Since 1928, this six-month period has yielded an average return of just 2% a year. By contrast, the average gain from November to April is about 4%. So sure, there's some truth to the "sell in May and go away" adage... But the difference in performance is marginal. A strong May has a much bigger impact on performance, though. With enough momentum going into the summer, stocks have the potential to really take off. May's 5% return this year was exceptional. It was the best performance for the month since 2009. May has only seen better returns 10 other times since 1928. I wanted to see what happened after other high-performing Mays. So I found every example of the month returning 4% or more going back to 1928. Again, a strong May is the exception, not the rule. I only found the signal in 18% of years since 1928. But when stocks do perform well in May, it typically spells big outperformance over three- and six-month time frames. Take a look...
Stocks have returned about 6% a year going back to 1928. But they tend to seriously climb after a strong May. The signal returned 7% in an average three-month period (ending in August) and 14% in a six-month period (ending in November). As for the win rate, stocks were up in 53% of cases after three months... only a little better than a coin flip. But they were up in 76% of cases after six months. So this is a reliable signal in the longer time frame. According to history, May's 5% performance should prove to be a significant tailwind for stocks. Now is not the time to sell... The bulls have momentum on their side this year. And in this kind of environment, stocks can absolutely soar. Good investing, Sean Michael Cummings Further Reading The market had its first pullback back in April – putting an end to a multimonth winning streak. That might make some investors nervous. But according to history, this isn't a bad omen for stocks... Read more here. "The biggest investing returns come to those with patience," Sean writes. You don't have to invest dangerously to see life-changing returns. Instead, let the power of compounding do its work for you... Learn more here. |
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