Friday brought losses to Wall Street, with the stock market suffering daily declines to finish what was otherwise an extremely strong month of April. The drop wasn't too severe, with the Dow Jones Industrial Average (^DJI -0.49%), S&P 500 (^GSPC 0.09%), and Nasdaq Composite (^IXIC 0.65%) all limiting their losses to between 0.5% and 1% on the day.
Every year at this time, investors with an appreciation for seasonality trot out the old maxim, "Sell in May and go away." This informal guidance, coupled with an admonition to buy back into the market in November, is designed to reflect that many of the market's worst performances have come in the late spring, summer, and early autumn months. Yet despite its simplicity, there are some excellent reasons why selling in May isn't necessarily your best move.
How the market did on Friday
Markets were down most of the day, as investors consolidated their gains from earlier in the week. Earnings reports continued to indicate economic strength, but that was largely anticipated, and the question remains how long the upward momentum for the Dow, S&P, and Nasdaq can last.
|
Index |
Percentage Change |
Point Change |
|---|---|---|
|
Dow |
(0.54%) |
(186) |
|
S&P 500 |
(0.72%) |
(30) |
|
Nasdaq Composite |
(0.85%) |
(120) |
Data source: Yahoo! Finance.
The mixed track record of the sell-in-May rule
When you think back on stock market history, it's easy to understand where the sell-in-May rule got its appeal. The stock market crash of 1929 happened in October. The 1987 crash also happened in October. And when you look back at the financial crisis in 2008 and 2009, the big declines for the stock market began in September and continued into the following month.
Image source: Getty Images.
However, the rule's track record is far from perfect. In 2020, the stock market plunged in February and March, giving followers of the rule big losses. From May to October, meanwhile, the market regained all of its lost ground and then some.
Moreover, the period from May 1 to October 31 has given investors positive returns more often than not lately. The following chart goes back a decade:
|
Year |
S&P Total Return, May 1 to Oct. 31 |
|---|---|
|
2011 |
(7.1%) |
|
2012 |
2.2% |
|
2013 |
11.1% |
|
2014 |
8.2% |
|
2015 |
0.8% |
|
2016 |
4.1% |
|
2017 |
9.1% |
|
2018 |
3.4% |
|
2019 |
4.2% |
|
2020 |
13.3% |
Data source: Yahoo! Finance. Table by author.
Selling in May hasn't been a net winner in 10 years. The gains haven't always been big, but they've usually been a lot better than what you'd earn in a cash savings account or other short-term investment.
A taxing strategy
The other problem with using a seasonal strategy is that if you do all this buying and selling in a taxable account, you'll end up paying capital gains taxes a lot more often. Moreover, because you'll only have held onto those investments for a six-month period, your tax rate will be at the much higher short-term capital gains rate -- the same as ordinary income.
Investors who buy for the long haul get to benefit from lower long-term capital gains rates. It just takes owning stock for a year and a day to get access to reduced tax rates that in some cases go all the way down to 0%.
Don't time the market
It's tempting to use seasonal trends and other timing strategies in order to try to avoid suffering losses. However, following such strategies often just leads to missing out on further profits. You're better off choosing a strategy that you can stick with through thick and thin without worrying about what month it is.
