What are we looking for?
May is upon us, and once again it's an opportune time for the investment community to discuss the "sell in May and go away" phenomenon. It is the observation that equity-market returns in November through April outperform May to October.
The screen
We examine the historical performance of the S&P/TSX composite index and various sector and style indexes during both sets of months across the past six years (four of which are shown in the accompanying table). For each annual period, returns are broken into two sub-periods: November-to-April and May-to-October.
This is a pure seasonal strategy, which does not take any fundamental or technical factors into consideration.
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What did we find?
The S&P/TSX composite index has provided superior returns during the November-to-April sub-periods in five of the past six years. The same applies to the S&P/TSX 60 and the S&P/TSX small-cap indexes. In fact, the S&P/TSX composite has returned an average of 6.2 per cent in the November-to-April period against minus 1.88 per cent in May-to-October between 2010 to 2015. It is worth noting that defensive sectors such as utilities and consumer staples outperformed in the November-to-April period in 2013, which is the one year the S&P/TSX composite did not.
This calendar anomaly should be approached with caution, as our sample period is quite small, and correlations across indexes should be taken into consideration, in addition to overlaps in securities in market-weighted indexes, evident in the close tracking between the S&P/TSX 60 and S&P/TSX composite indexes. There are a number of possible explanations behind this seasonal phenomenon, such as: low trading volume and liquidity during summer months; tax-related events; the fact that a significant portion of companies announce year-end results and potential dividend hikes/stock splits in the November-to-April period – or possibly a combination of all of these factors.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Khaled Eniba works in the financial and risk unit of Thomson Reuters and specializes in banking and research.