Mark Lister: Sell in May and go away?

The only instances of US shares declining in an election year during that period are in 2000 and 2008, which were both around the time of major US recessions, writes Mark Lister.

OPINION

There are many sayings in the investment world, and one that always comes up at this time of year is “sell in May and go away”.

The adage emerged in the Northern Hemisphere and it suggests investors should sell their shares in May, relax and enjoy the summer months then return to the market in the autumn (or spring, here in New Zealand).

It’s based on a suggestion the six months from November to April typically offer higher returns than the May to October period.

There’s some truth in this, if we look at seasonal patterns over the years.

Since 1945, the S&P 500 index in the United States has returned an average of 6.9 per cent from November to April, and it’s been up on 61 of those 80 occasions (which equates to an impressive hit rate of 76 per cent).

In contrast, the six months from May to October has averaged a return of just 1.7 per cent, and the proportion of positive returns falls to 66 per cent.

The numbers aren’t quite as lopsided in the more recent past, but when you look at the last 10, 20 or 30 years of returns, there’s still a clear pattern of outperformance from the six months from November to April.

So will it work this year?

Maybe. There are definitely a few reasons to think we might get a few bumps in the road over the next little while.

For a start, the S&P 500 has had a cracking run, rising 17.5 per cent in the past six months.

We’ve also seen double-digit returns in Europe, the United Kingdom, Japan, Australia and in emerging markets.

Major indices in many of those regions have hit new highs in recent months, and it wouldn’t be surprising if markets took a breather after this strong run.

Investors are also grappling with persistent US inflation, and a central bank that looks unlikely to reduce interest rates until quite late in the year.

We’ve also got the US presidential election in early November, which is less than six months away now.

That doesn’t mean there’s any need for panic amongst share investors.

In the 20 election years since 1944, the S&P 500 index has risen on 18 occasions.

The only instances of US shares declining in an election year during that period are in 2000 and 2008, which were both around the time of major US recessions.

The average return has been 10.8 per cent in those 20 years, very close to the long-term average.

Having said that, election years often prove softer than usual during the first half, with the gains coming through more strongly in the second half.

Despite the potential headwinds, I wouldn’t make any significant portfolio moves on the back of the ‘Sell in May’ concept.

Every year is different, and the seasonal trends don’t account for the uniqueness of each period.

It might be a chance to take a lower risk approach, or get out of positions that no longer fit with your strategy, but I wouldn’t do anything as drastic as selling out then trying to time my way back in.

If we do see a bit of volatility over the coming months, it could be an opportunity for those who’ve missed the rally since last October to do a bit more buying.

Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.