May 25, 2022
Coming off one of the worst years in recent history, it’s no question 2023 has been a better year for the markets so far than 2022.
Following a bumpy March, the S&P 500 traded in a narrow range of just 3% throughout the entire month of April.
It was a bumpy month for equity markets as uncertainties in the banking industry led to a handful of bank closures and a spike in volatility.
Have you ever heard the saying, “sell in May and go away?” Originally dating back hundreds of years in England, and later popularized by The Stock Trader’s Almanac, the idea is that investments tend to perform worse in the summer months. Thus, one could theoretically avoid the drawdown by selling off their equity holdings and rebuying before the market trends back upward in late Fall. If only it was that simple!
The concept is not without some merit—historically the best six-month period for returns on average has been November through April. However, this doesn’t mean that this strategy should automatically be adopted every year, especially without taking other factors into consideration.
Financial markets used to be far more impacted by the seasonality of farming and agriculture, which partly explains the past correlation with the down summer months. These effects have lessened as technology companies have become a much larger driver of markets in recent years.
While the pattern will certainly hold true in some years (just like with most indicators), it’s definitely not an every-year occurrence. Looking at data from 2011 to 2020, there were four years in which the S&P 500 surpassed a 7% return, which could have resulted in a large opportunity cost if applying the sell in May strategy (and there were four additional positive returns, with only two negative periods).
There can also be large month-to-month fluctuations throughout the year. Take a look at the following graph, which shows that the average percent change by month is actually greatest in July, during the heart of what would be the sell-out period.
The data illustrates that following this old saying and avoiding stocks for half the year can lead to a lot of potential missed opportunities.
Ultimately, it is important to take a more holistic approach to investing, using data that is relevant to the current market environment when making portfolio decisions. Sticking to a sound investment strategy as part of an overall financial plan, rather than chasing old adages, is most often the best way to achieve your long-term financial goals.
Disclosure:
Winnow Wealth, LLC (“Winnow Wealth”) is a Registered Investment Adviser.
The information presented is not investment advice – it is for educational purposes only and is not an offer or solicitation for the sale or purchase of any securities or investment advisory services. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser when making investment decisions.
This content is intended to provide general information about Winnow Wealth. It is not intended to offer or deliver investment advice in any way. Information regarding investment services are provided solely to gain an understanding of our investment philosophy, our strategies and to be able to contact us for further information.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Past performance is no guarantee of future returns.
Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.
Additional Important Disclosures may be found in the Winnow Wealth Form ADV Part 2A. For a copy, please Click Here.
Winnow Wealth, LLC (“Winnow Wealth”) is a Registered Investment Advisor (“RIA”), located in the State of Texas. Winnow Wealth provides investment advisory and related services for clients nationally. Winnow Wealth will maintain all applicable registration and licenses as required by the various states in which Winnow Wealth conducts business, as applicable. Winnow Wealth renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or pursuant to an applicable state exemption or exclusion.
