Why Not to Sell in May and Go Away | Chief Investment Officer

Ah, it’s May. Time to dump your stocks. As the old saying goes, “Sell in May and go away.” After a summer snooze, the logic holds, stocks are better bets in November.

LPL Financial’s research folks say that, historically, meaning since 1950, the sell-in-May adage is largely true—except for seven of the past eight years. From 2012 through 2019, the S&P 500’s lone down period in the May-October range was in 2015, when it was off 0.3%. And that was during the mid-decade mini-recession, when economic growth slowed due to an oil-price slump.

The rest of the time, the top performer was 2013, up 10%. Now, this just happened to be when the post-financial crisis bull market really got going. The question arises: Isn’t LPL just data mining by lopping off the first two years of the past decade?

After all, if you rope in 2010 and 2011 (down 0.3% and 8.1%, respectively), which was when the European debt crisis got underway, the May-October record is a little less shiny. Nevertheless, the summer spell still comes out ahead with the most gaining periods (seven up, three down).

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The old-time thinking was that investors, not to mention stockbrokers, were on summer vacation a lot, or at least taking things slower. Thus, stocks drooped because of inattention. The rise of rapid-fire trading and index funds, and the shrinking of individual stock names because of mergers, among other reasons, may have injected some scarcity psychology among equity traders. And stock prices over the past eight years got especially juiced.

“Stocks are up more than 30% from the March lows, suggesting a well-deserved pullback during these troublesome months is quite possible,” explained LPL’s senior market strategist, Ryan Detrick, in a research note.

Whatever the explanation, May 2020 isn’t off to a rollicking start, down 1.5%, thanks to Friday’s (May 1) slide of almost 3%. Monday and Tuesday were positive, but not enough to reclaim all the lost ground. And more down days could well come in the not-so merry month of May and beyond.

But that doesn’t mean that May or those other balmy months will necessarily be lousy for stocks. The gigantic Washington aid program will be an important factor. “With the dual benefits of record monetary and fiscal stimulus helping to bridge those most impacted by COVID-19,” Detrick continued, “we continue to expect this recession to be one of the shortest on record and a much stronger economy later in 2020.”