A popular adage in the investment world is: “sell in May and go away”. This unique strategy has been a popular belief that entails selling stocks in May and buying back into the market in early November. The belief being that market returns tend to be weaker in May through October.
Although there is a correlating truth to this belief, in that weaker returns generally occur during this period, it is also true one can still discover very high and positive returns, if you know where to look.
In 2017 the S&P had a 4.3% total return from May to October. And in 2016 the return was 7.4% in the same period. So the returns are there.
Interestingly, some sectors have traditionally performed less well during this period. And it’s true that cyclicals have smaller gains during the summertime. However, defensive sectors have usually shown to be more resilient.
For example, let’s have a look at a mining company, Agnico Eagle Mines, who is in the materials sector, a highly cyclical sector. And also let’s look at the consumer staples sector, Lassonde Industries, a juice producer, which is not cyclical at all.
In 2016, Agnico had posted total returns of 15.1% from May through October. For the entire year they were up a remarkable 56.5%. So although their returns were indeed weaker from May to October, you can’t discount the fact that they still posted an impressive gain of 15% during their weakest window.
For Lassonde, if you were fortunate enough to have invested in this company for the entire 2017 period, you would have seen a 15.9% gain. From May 1st through October 31st though their return was only 2.1%. In this case, it would have been best to have invested for the entire year. In 2016, their May to October return was better at 14.6%.
To sum up, the idea of “sell in May and go away” doesn’t always apply when looking at defensive sectors. Although returns are indeed weaker from May through October for cyclical sectors like materials there is a chance you can lose out on positive returns if you’re not invested during that period, as was the case in 2016. Cyclical stocks usually are very volatile so it makes them naturally more difficult to predict.
There is no quick route. And it’s always tempting to look for new ways to improve your returns and limit your loses, but looking to the “sell in May” belief usually isn’t the best of strategies. Ideally, reach for the long-term with stocks that have shown to be stable and post strong returns over the years and then don’t panic on the first signs of a downward trend in the short term.
If you want to isolate yourself from the stress of short-term losses, then your best approach would be to rotate sectors instead of selling out of the markets entirely. In other words, investing in cyclicals from November to April, and then shifting to defensive sectors from May to October.