Will Sell in May work this year? Here’s what to consider when deciding whether to stay invested

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It’s that time of year when the “Sell in May and go away” strategy that advocates for reducing stock market exposure from May to October is on many investors’ radar. But does the current environment of a slowing economy and high interest rates support or detract from this market move?

The concept is based on the historical trend of stocks, on average, performing better in the six-month period from November to April compared with the following six months.

Many have questioned whether this theory works every time because there can be gains from May to October, and reducing market exposure could lead to missing out on them.

This viewpoint misses the point of risk consideration in making allocation decisions. No strategy works all the time. None.

To say a strategy might not work this year because it has, sometimes, not worked in the past is short-sighted. That’s because it’s important to consider other factors, such as how often the strategy has worked and what was the magnitude of losses or gains over that period?

If you had to choose to invest in the S&P 500 only six months of the year, what period would you choose? November to April or May to October?

The S&P 500 has outperformed from November to April compared to May to October in every decade since the 1950s, according to Bloomberg LP data. In other words, investors would choose to invest from November to April.

During November to April, the S&P 500 has also produced larger gains and fewer losses, on average.

A good analogy for using Sell in May in an investment portfolio is comparing driving a car in good weather versus stormy weather. In good weather and dry roads, it’s possible to drive at the speed limit and be reasonably safe. In stormy weather and wet roads, the probability of a crash increases when driving at the speed limit.

The six-month period from November to April is akin to good weather and dry roads. Investing in this period does not mean you cannot crash, but your chances of crashing are less than in the six-month period from May to October. This period is akin to bad weather and wet roads, and investing during it leads to losses more often.

What performs well from May to October?

Sell in May doesn’t imply there’s only a binary decision of whether to invest in the market or hold cash. There are stocks that can perform well in this period.

For example, the biotech sector tends to perform well from late June until mid-September, gold tends to perform well from early July to early October. In addition, government bonds tend to perform well from early May to early October.

There are many more sectors of the market that tend to perform well in this period. In general, they’re the more defensive sectors.

Will Sell in May work this year? No one knows. No one ever does.

Investing is all about stacking the odds in your favour. But additional storm clouds are on the horizon. Central banks are removing liquidity from the markets by maintaining high interest rates and decreasing their balance sheets. These actions are generally not favourable for the stock markets and maybe it’s time to let up on the gas pedal.

Brooke Thackray is research analyst at Horizons ETFs Management (Canada) Inc.

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