Seasonality
— Derek Hoggett, Chief Executive Manager, Investa, November 1, 20
12
The “Sell in May and Go Away” followers are returning, just in time for the January Effect and the post-presidential election year cycle!
Can investors use this confluence of seasonal factors to improve their odds of investment success? Or will this time be different?
Let’s look at the research.
The “Sell in May and Go Away” Strategy
Ned Davis and others report that that during the fifty years from November 1957 to October 2007, buying in November and selling in May gained 38 times for an average annual gain of 7% versus the S&P 500’s average annual gain of 8.6%. The strategy produced almost as much return as a simple buy and hold strategy but with only half the risk, since you would have been out of the market half the time.
In an October 2007 study, Harrison Hong at Princeton and Jialin Yu at Columbia found that stock returns were indeed lower in the summer than non-summer. They found this effect is larger for the top ten markets than for lower markets, and more pronounced in Europe andNorth Americathan in other regions. They found that stock returns are lower during the summer for countries with significant declines in trading activity.
Bouman and Jacobsen found that the mean return is lower from May to October compared to the rest of the year for a large cross-section of 37 countries.
Chen and Jindra found that stocks are on average the most favorably priced before year-end and the least favorably priced in mid-year.
However, Motley Fool found that from 04-30-26 to 03-31-12, the S&P annual return, including dividends, of the “Sell in May, Come Back in November” strategy of 8.4% underperformed the 10% for a Buy and Hold strategy.
Investing in a Post Election Year
Professor Marshall Nickles at Pepperdine also found support for The “Sell in May and Go Away” Strategy. He found that from January 1st 1970 to December 31st 2005, buying the DJIA in November 1 and selling on May 1 would have returned 1,681 percent versus 1,266 percent for a buy and hold strategy. However, investing only in the year before the presidential election and in the money market for the other three years, would have returned 2,406 percent and with no losing years. Even better, he found that by investing in the DJIA from November 1 to April 30 only, but being fully invested for the entire pre-presidential election years (9) during the thirty-six year period would have returned 4,685 percent with only 5 losing years.
The Stock Trader’s Almanac found that the last two years of the 44 administrations since 1833 produced a total net market gain of 724 percent, versus a 273.1 percent gain for the first two years of the administration. Presidents typically take more painful initiatives in the first half of their term and prime the pump in the second half. The Almanac says that in the past 25 post-election years, three major wars began and four drastic bear markets started, and that practically all bear markets began and ended in the two years after presidential elections.
The Year-End and January Effect
Markets tend to have strong returns around the turn of the year so if you are looking to tax loss sell you might want to do so before many investors sell stocks en masse at year’s end. Remember, buying mutual funds in December before the annual distribution risks paying taxes for gains made by the fund throughout the year.
Jeremy Siegel and The Stock Trader’s Almanac found that investors return to equity markets in January with a vengeance, pushing up mostly small cap and value stocks, so the end of December has been a good time to buy them.
Zhiwu Chen and Jan Jindra found that as year-end approaches, stocks that are beaten down and under-valued become even more undervalued, while stocks that are already overvalued will grow more overvalued. They cited performance-chasing at year-end by portfolio managers and to tax-loss selling. After the turn of the year, all of these valuation trends are reversed. They found that seasonal valuation patterns are the most severe for small-cap, in terms of changes both around year-end and from year-end to mid-year.
Chen and Jindra found that the January effect was largely due to small-cap firms. Small-cap stocks have the lowest valuation in December and show the strongest January effect. The more underpriced a stock in mid December and/or the smaller the firm, the higher its return over the next month.
Again, Chen and Jindra found that stocks are on average the most favorably priced before year-end and the least favorably priced in mid-year.
The End of Month Effect
Stocks tend to rise at the turn of a month and fall in the middle of a month mostly due to mutual fund money flows.
The End of Quarter Effect
Fund managers window dress at the end of each quarter by buying stocks that have done well during the quarter. This is because keeping their job is more important to many fund managers than the best interest of their fund holders.
Caveats.
1. In a globally diversified portfolio, the non-US part may not exhibit the same seasonal trends as the US market.
2. The biggest problem of investing based on stock market cycles is being out of the market during a bull rally.
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