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Sell in May and be back in September

but what about the corona influence?

Written by Kaspar Huijsman | 5 minutes
WED 06-05-2020
Although market wisdom often sounds funny, it usually has some trught in it. One of the most famous sayings goes as follows: 'Sell in May and go away, but remember to come back in September'. This widely used statement among investors states that equity returns are less good from May through August and suggests that it is wise to sell shares in the spring. And to buy again in early September, because better trading days will start.

Since it is May, the question arises as to whether there is some truth in this wisdom. Much research has been conducted into the phenomenon in recent decades. And some of them seem to confirm the adage at first. Is it, therefore, time to sell your shares now? Or is that too premature - also with the view on the coronavirus? In this article, we try to give you more insight into this seasonal effect.

The origin of the saying
The story goes that this saying came about when the notables - investing used to be reserved only for doctors, mayors, and notaries - retreated to their estate in the summer and came back to the city around the fall to work and to engage in stock trading again. 

Nowadays, the sale of part of the equity portfolio to pay for the summer holidays - or as extra pocket money when traveling - is touted as one of the possible explanations for lower returns in the summer and thereby confirms stock market wisdom. Investors would also like to take some risk off the table in the summer months, as they are less likely to be busy or just don't want to bother with their investments during their holidays (although, according to the Binck app results show something different). But what do researchers say?

The Halloween effect
Scientists Sven Bouman and Ben Jacobsen came to a clear conclusion in their research in July 2001. In 36 of the 37 countries surveyed, average monthly stock returns between November and April were found to be significantly higher than those for May to October (from 1970 to 1998). Halloween (October 31) was the turning point for investors in their eyes, so Bouman and Jacobsen spoke of the Halloween effect. After Halloween, a more favorable period for investors followed: returns in the winter months were usually above 8%. Although they did not see September as a comeback month, there was a positive development from November to April, especially in European countries.

Critical sound, larger research
As a result of the above study,  scientists Edwin Maberly and Raylene Pierce published a critical reaction on the study of Bouman and Jacobsen. They examined the results of Bouman and Jacobsen for the U.s. equity market, and came to this part of the examination to a different conclusion. If the extreme price movements – such as the wall street crash of October 1987,  – are being excluded there won’t be a Halloween-effect

These skeptical statements led Ben Jacobsen to start a new and much larger investigation, this time with Cherry Zhang. They used data from 109 countries dating back to 1694 (!). The main conclusions they presented in October 2012 (last revised in October 2018)? On average, the 'summer return' (May-November) of the dataset was 2.4% and the 'winter return' (November-May) 6.9%. A 4.5% difference in favor of the 'winter months'.

That the ‘’real’’ comeback moment, just as in the first study, where Bouman had been involved in – is not at the beginning of September, but by the end of October. Once again, we can speak of a Halloween effect.

How could you apply this as investor?
In other words, should you "sell and leave in May"? Maybe only if you are an active investor and see better opportunities in the summer months. If you are a long-term investor, there are generally other factors you should make your investment decisions on. Is your portfolio still in line with your risk profile? 

In short: what about your cash, stock, and bond ratio needed to achieve your investment objective? And do you have a good balance between value and growth shares within the portfolio?
Besides the fact that the parts of the different studies to each other, sometimes disagree, we are dealing with aggregate data, on the basis of the historical exchange rates. And it doesn't have to be so that in the future, similar conclusions can be drawn from them. There is no assurance that any seasonal effect is of a permanent character.

And what to think about the coronavirus? It could make a seasonal pattern unreliable. The coronavirus caused a big drop in the stock markets. Various world stock exchanges at this time are approximately 10 to 20% below their peak. The news of a ‘hopeful’ corona medicine or other large-scale financial support from the global economy, by policy-makers, can recover the rates significantly. And that return will pass you by...if you would take distance of your stocks in May.


Kaspar Huijsman

Kaspar Huijsman is the director of BinckBank in Spain & Portugal. He has been working for BinckBank for over 20 years now and founded the office in Marbella in 2006. A seasoned expert in investment, he offers seminars throughout Spain and Portugal.

The information in this article should not be interpreted as individual investment advice.  Although BinckBank compiles and maintains these pages from reliable sources, BinckBank cannot guarantee that the information is accurate, complete and up-to-date. Any information used from this article without prior verification or advice, is at your own risk.  We advise that you only invest in products that fit your knowledge and experience and do not invest in financial instruments where you do not understand the risks. 

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