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We’re not inclined to automatically buy in to perceived wisdom, and you probably aren’t either – especially after the start of the year we all just experienced.
But that shouldn’t stop us from exploring market proverbs to see if there a kernel of truth within them. Several folks, for example, have taken stabs at “return seasonality”. You know, where stock market returns start getting really lousy after April of any year. You’ve heard it yourself before; the old “sell in May, and go away” maxim.
So we’ve gone and pulled down actual total return data on the S&P500 since December of 1939, and done some work; work which you might find interesting.
Eyeballing the first big table further below ‐ with the best six months shaded in green, and the worst six months unshaded ‐ it’s tough to see much of anything in terms of seasonality.
If we break down each of these data points, here is the average total return of the SPX (by month) from 1940 through 2021:
The first thing you should notice is that since 1940 – which was 82 years ago – every single month has shown an average positive return.
Since all of the months are winners, the adage “sell in May and go away” seems like a misnomer at first blush.
However, there were significant differences in “performance” by each month which may or may not be random.
One way to examine this conventional market wisdom is to look beyond the annual returns in any given year, and instead analyze the average returns during the “season” for a period of some years going forward.
In the spirit of Edward Tufte, we found one author(1) a few years back who created an excellent infographic using this method. We had some issues with the author’s methodology (he used “volatility-adjusted returns” and we weren’t clear why), but the visualization of the data was illuminating.
So we wanted to explore it a little bit further.
A great deal of empirical work has already been done on return anomalies and seasonality, including some suggesting that the “Sell in May” or “Halloween Effect” has been persistent not just in the US, but in the UK – and for over 300 years(2). However, we have not seen any similar infographics accompanying this kind of work.
And when we rank the months some seasonality does indeed start to emerge. Using single years of data, December, for example, has historically been the best month. And May ranks 9th out of 12.
And if we take the returns five years at a time (so, from 1940‐1944, 1941‐1945…2017‐2021), and rank the months, we see this:
And with twenty‐year data, it looks like this:
Then, when we then consider the magnitude of the average returns during these seasonal periods, we can make a few interesting observations:
- At least in the period from 1940 through 2021, the gains from buying in late‐September and selling in late April have exceeded those from May to September.
- The difference is stark. In the five months from May to September, the average market gain has been 3.0%. In the seven months from October to April, the average market gain has been 9.4%.
- And this one will knock your socks off. Cumulatively, over the past 82 years, the S&P 500 has seen May to September gains of 658%. The October to April period has experienced gains of over 95,000%.
How's that for compounding?
The second table further below shows how this seasonality emerges over longer time horizons. Our results use actual returns rather than Sharpe ratios (or other volatility‐adjusted metrics), and we haven’t done anything special with any factors. In any event, however, we think it is fair to conclude (as many empirical studies already have) that there may be something to this “selling in May and going away” thing, especially over very long time horizons.
Not sure how practical any of this is, nor if we have enough observations here for this to be anything but random chance. However, if you ever have to be out of the market for a few months – and if history is any guide ‐ then you probably shouldn't do it from October to April.
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FOOTNOTES
1) In the original link here the author implicitly thought the data was too good to be true as well, as it was part of a larger article attempting to debunk the seasonality implicit in the “Sell in May and go away” trading adage. As part of his article, he showed an impressive cumulative outperformance of a trading strategy long from November to April and then neutral from May to October – but suggested that it was backward looking – and that if any investor had simply been long the six best months from over the previous ten or twenty years to that date – there was no outperformance as you “walked the test forward”. However, when we choose different “walk‐forward” periods, we actually do see some seasonality in the data.
2) Are Monthly Seasonals Real? A Three Country Perspective. Jacobsen Yang (2010).
DISCLAIMER
The views and opinions expressed in this post are those of the post’s author and do not necessarily reflect the views of Albert Bridge Capital, or its affiliates. This post has been provided solely for informational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The author makes no representations as to the accuracy or completeness of any information in this post or found by following any link in this post.
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