Sell in May and go away, is one of the most famous phrases in relation to stock market timing. If this advice is taken and put in reverse, it would suggest the months leading up to May would be a time to buy ….. but, does this hold out statistically ?
According to data and research by Bloomberg, it does appear that the winter and spring months have historically out-performed the rest of the year. This is the case in the US stock-market, and internationally.
The optimal months appear to be November to April, once the summer holiday period is well and truly over. Historically, the end-of-year and start-of-year are key times when the investment markets are buoyant and optimistic. The best way to illustrate this is via some charts, courtesy of Bloomberg.
The data is clear, an average return of almost 7% in the winter months, versus around 2% during he summer. Clearly this will not be the case every winter, in fact strong returns are seen around two thirds of the time during this period. However, the data is statistically significant, and worthwhile considering.
This research is based on the US stock-market represented by the S&P 500, which includes 500 of the largest American companies. So it would be relevant to index tracker funds, not to picking out individual stocks.
Similar patterns can be seen in other countries ……….
So it appears over a long time period, there is an average out-performance in the winter, and an under-performance in the summer, in these three major stock-markets.
The same does not apply to bond and fixed interest investment, where almost the opposite is apparent. The summer months are some of the best times for bonds to perform, and the winter months are much weaker. So, if you have a portfolio including stocks and bonds, be careful to apply the correct strategy to the relevant assets.
So, what would happen if you put all this data into an investment strategy, and compared it to just investing in a US stock-market tracker fund ? The green line in the line chart below, provides the answer.
In green, we have a strategy of investing in (buying) US equities from November to April, closing the trade by May. Then in May investing in US government bonds, and closing the trade by November. This is repeated from the 90s to the present day to provide the chart below.
It can clearly be seen that seasonal investment performance has out-performed a simple buy-and-hold strategy in the US stock market.