It’s an adage thrown around this time of year. The notion that markets do worse in the summer, or according to some, from mid – May to October. Is there any wisdom to it?
Conceptually, it does make some sense as the summer is slower and quieter with folks on vacation, at the beach, etc.. Hence, there is less volume which perhaps leads to lower returns. And a look at historical data does indeed reveal some seasonal tendencies:
The average monthly returns (excluding dividends) for the S&P 500 by month since 1950
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1.03 0.05 1.17 1.48 0.21 -0.03 0.98 -0.09 -0.52 0.94 1.50 1.62
It is a fact that June, August and September have been negative, historically, but notice how July makes up for all of it! And October has been pretty good on average, contrary to popular perception (likely stemming from two big crashes 1987 and 2008 which were in October).
So it turns out that, historically, an investor would have under-performed a buy and hold strategy by around 1.5% annually for being out of the market (S&P 500) from May – October. (That’s without taxes and transaction costs, heaven knows what they add to the cost)
Perhaps very skilled traders might benefit from taking more aggressive trades seasonally – but it’s risky even for them, especially in any one year. And if there are some seasonal tendencies based on low volume historically, who is to say they will continue into the future with more and more trading occurring electronically (That is even when the traders are on the beach!)
So my best guess is that 99% of us should NOT sell in May and go away but instead create, monitor and stick to a longer term financial plan, even if it gyrates through summer and winter alike.