Sell in May and go away? Not always

Stocks look set to buck trend, as US economy gains traction

NEW YORK • "Sell in May and go away", arguably the most well-worn axiom on Wall Street, has proven to be shrewd advice during previous mid-term election years.

Though the exact origins of the phrase are murky, up until recently, stocks had underperformed in the six-month period starting in May, which coincides with vacation for many traders between the Memorial Day and Labour Day holidays.

But this year, investors may be better served by eschewing the adage as stocks look positioned to buck that trend, with corporate profits coming off a banner quarter and as the United States economy continues to gain traction.

According to the Stock Trader's Almanac, the Dow Jones Industrial Average has lost 64.71 points from May through October since 1950, versus a gain of 20,790.89 for the November through April months. Over the same timeframe, the S&P has gained 264.31 points during the May-October period, compared with a gain of 2,420.72 points during the other six months.

While stocks have gone up in the November-April period, volatility has also risen. After hitting a record high on Jan 26, the S&P fell more than 10 per cent to bottom out on Feb 8 at 2,581 and tested the low again in late March. It now sits about 5.5 per cent below the January high.

"I don't think it is going to work this year," said Mr David Joy, chief market strategist at Ameriprise Financial in Boston. "The economy is strong, earnings are good, the market has already sold off a little bit."

This year, May is off to a strong start, with both the Dow and S&P on track for their best performance in the month since 2009.

But mid-term years have proven to be particularly troublesome, according to data from LPL Research.

Elections for the US House of Representatives and Senate are set for November. Historically, the party in power loses seats after a new president's election, and the Republican Party currently holds a majority in both houses.

Since 1950, mid-term years have yielded only an average gain of 0.1 per cent on the S&P in the May-October period, with the index also suffering an average peak-to-trough pullback of 14.7 per cent, the largest of the four years in the cycle.

Yields on the benchmark 10-year US Treasury note touched a high of 3.128 per cent last Friday, their highest level since July 2011.

As for selling in May, the last time the month was negative for both the Dow and the S&P was 2012.

In the five years since, the S&P has risen in the May-October period four times, with the only fall being a 0.3 per cent dip in 2015.

"In these next six months we would be buyers of any weakness and wouldn't be shocked at all if we bucked the 'sell in May and go away' trend for the sixth year out of the last seven," said senior market strategist Ryan Detrick at LPL Financial in North Carolina.


A version of this article appeared in the print edition of The Straits Times on May 22, 2018, with the headline 'Sell in May and go away? Not always'. Print Edition | Subscribe