Should You ‘Sell in May and Go Away’?

“Sell in May and go away” is a classic stock market adage. The theory suggests that market returns during the summer months are dramatically lower than returns generated from the end of the summer to the end of April.
Is there some validity to this theory? Put simply, yes.
Does it make sense for you to “sell in May and go away” this year? That’s a bit tougher to answer.
Let’s start with some data.
According to USA Today, the S&P 500 has only averaged a 1.7% gain between May and October going all the way back to 1950. Compare that to the 13.9% gain generated between November and April and you can easily see why “sell in May and go away” has drawn attention from investors.
The same USA Today report notes that some stocks do very well in May. It cites three stocks that have excelled during the month of May during the past five years.
Video game maker Electronic Arts (NASDAQ: EA) has gained an average of 10% during the month of May since 2010. Level 3 Communications (NASDAQ: LVLT) and Delta Air Lines (NYSE: DAL) have both gained an average of roughly 7% during the same periods.
The USA Today graphic below illustrates these examples and several more.

The following graphic comes from Business Insider via FBN Securities. Looking at the performance over the past 20 years, FBN stopped short of saying that “sell in May” works.
“We are not saying to ‘Sell in May,’ as we are still constructive on the market, but rather our main message is to manage expectations over the next few months,” said JC O’Hara of FBN.

It is worth noting that “sell in May” means different things depending on whom you ask. USA Today defines it as exiting the market from the beginning of May to the end of October. FBN Securities defines it as exiting the market from the beginning of May to the end of September.
Despite what appears to be convincing evidence in favor of selling and going away, there are some very compelling reasons why you shouldn’t – at least this year.
Barclays, in its recent note to investors, offers three reasons not to exit the market this summer:

1. “While historical returns are lower from May to September, they are still positive.”
2. “The ‘sell in May’ pattern is most-pronounced when returns are negative in the winter. This year, they were positive.”
3. “Periods of prolonged summer weakness have coincided with a sharp deterioration in economic data, starting in May. … In other words, ‘selling in May’ worked when the data got worse. This year, however … economic data is likely to rebound, in our opinion.”

Barclays’ conclusion? “We do not recommend selling in May.”
All of that said, if you could predict market returns simply by studying historical returns and seasonal trends, making money in the stock market would be free of risk. And we know this is not the case.
The S&P 500 is currently trading at a price-earnings ratio of around 20.4, well above the historical average. This suggests that the market is overvalued and likely to produce lackluster returns in the near term.
On the contrary, the S&P 500 is only up 1.48% so far this year. When you consider that the average annual return for the S&P 500 over the past 10 years has been 8.29%, it makes sense to remain invested in the market.
If you choose to “sell in May and go away” this summer, you may very well miss out on some summer stock market gains.

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