'Sell in May and Go Away,' as They Say

Statistically, owning stocks from Nov. 1 until April 30 of each year and getting out of the market for the other half of the year has been a winning strategy. Since both of their inceptions, the S&P 500 and Dow Jones Industrial Average have each gained an average of about 5% during the November-to-April period, and only 2% from May through October. That historical tendency to underperform has led to the Wall Street adage “sell in May and go away.”  There are many reasons for the underperformance during the summer and early fall months. A big one is that some of the market’s biggest crashes have come during that time—2020 so far not included. And trading volume tends to be slightly lower, possibly amplifying sudden swings in the market. As spring arrives, flowers start to appear, and it signals for investors to sell their stocks and take some time off, so they say. Exciting new vacation destinations might be difficult to find this year given physical distancing requirements, but the case for paring back some market exposure on May 1 is worth considering nonetheless. Since Nov. 1, 2019, the S&P 500 has slipped 4%. Of course that number obscures some unprecedented volatility. The index rose 11% from November through late February, tumbled 34% in the next month, and immediately bounced back. Since March 23, the S&P 500 is up 32%. Historical track record aside, there are some good reasons to be cautious about the market in the near future. The S&P 500 has gained nearly a third since late March, but amid the coronavirus pandemic, the road to recovery for the U.S. economy is going to be a long and uneven one. That means it could be time for stocks to at least take a breather. “Stocks are up more than 30% from the March lows, suggesting a well-deserved pullback during these troublesome months is quite possible,” LPL Financial Senior Market Strategist Ryan Detrick wrote today. And the potential pitfalls are numerous. Chief among them: If beginning to open the valve of economic activity results in a significant uptick in new coronavirus cases, expectations of a quick return to normality from here may prove to be too optimistic. The market won’t like that a bit.