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A Wall Street adage recommends investors take a break from stocks in May. The saying goes "Sell in May, and then walk away," indicating that stock-price movements historically have been substantially stronger in the November to April period than in the May to October stretch. It suggests that investors move into cash in May, steering clear of a typically weak period for equities, and back into stocks in November, when share prices usually begin to bounce back. Of course, as readers already know, past performance is no guarantee of future results.
Source: Standard & Poor's
A survey of price action for the S&P 500 Index from April 30, 1945, through April 21, 2006, shows that the old saying may have some merit -- but it doesn't necessarily hold true for every segment of the market, as we shall see. While the S&P 500 advanced an average of 7.1% during the November to April period over that span (without dividends reinvested), it posted an average gain of only 1.5% from May through October. What's more, the November through April period outperformed May through October 68% of the time.
The adage didn't work in 2004-05 (the S&P 500 gained 2.4% from October 31, 2004, through April 30, 2005, vs. a 4.3% advance for the 500 from April 30, 2005, through October 31, 2005), but the 8.6% advance from October, 2005, through April, 2006, may place this notion back on firm footing.
CASH INFUSIONS. History shows that the S&P 500's worst month is September, and that the worst three-month period is the third quarter, because, in our opinion, analysts typically reduce their full-year earnings estimates as third-quarter results are about to be released. October is historically a month in which the market establishes a bottom, so the S&P 500 enters November at a fairly low level compared to other months. This gives the November through April period the advantage of starting at a lower base.
The November through April stretch also includes two periods of large cash infusions into the market: January, when pension funds typically put a lot of money to work, and April, when many individuals add to their IRAs. November is also around the time of year that analysts begin looking ahead by five quarters, rather than just focusing on the final one or two.
One thing we always do, of course, is look at things from the sector level. Have S&P 500 sectors experienced a similar skewing of performances? Over the past 16 years (the most available for S&P 500 Global Industry Classification Standard sector data), it appears that they've also seen a pronounced seasonal pattern.
WINTER WONDERLAND. The table below shows simple average price changes (without dividends reinvested) during the two six-month periods for sectors in the S&P 500 from April, 1990, through April, 2006, along with their frequencies of outperformance (FO). The FO helps identify those sectors whose average performances may have been skewed by one or two stellar periods.
As with the overall market, the table shows that most sectors have seen their best results in the November through April period. On average, none of the groups posted negative results during the November through April interval, while two sectors posted average declines in May through October.
S&P 500 Sector Average Performances (Price Only) and Frequencies of Market Outperformance: April, 1990, to April, 2006