Strategies for investing during subdued market periods
Investment strategies often come with age-old adages, and one such popular belief is the "Sell in May and go away, come back on St Leger day." This strategy suggests exiting the stock market in May and returning in the fall to avoid a typically weak summer period. However, a closer look at historical data reveals that this strategy may not hold strong truth, especially when it comes to major indices like the MSCI UK and FTSE 100.
Research on the S&P 500, which shares broad market behavior traits with global indices, demonstrates that between 1975 and 2024, the market posted gains from May through October in 38 out of 50 years, averaging a positive return of 3.86% during this period. This indicates that abstaining from the market in the summer months could lead investors to miss out on gains more often than not.
Seasonal patterns data also highlight that months like May, June, and July can perform well historically in various indices. While there is some variation between different time frames and indices, there is no clear evidence that the summer months are universally weak. For instance, in the last decade, months like May and July have been among the better-performing in the S&P 500, while months like September and December have been weaker.
The MSCI UK index is used to examine the pattern of stock returns more closely. From 1970 to 2023, the return from being in the market between September and April has beaten the return from holding all the way from September to September in 25 years. However, calculating the long-term performance of a strategy of selling in May and buying back in September every year can seem to beat buying and holding, but this is due to a tiny number of extreme events. Knocking out these extreme events reverses the outperformance, suggesting it's a statistical fluke.
The odds of avoiding losses by selling for the duration of the summer have been worse than a coin toss. Despite volatility in late July, the market has been up since then. May, June, and September have negative returns on average and have been negative a little more frequently than they have been positive.
The origin of the belief that the summer is riskier for stocks is unclear, but it may have arisen due to a decrease in investing activity during spring and summer. However, empirical evidence shows that markets often produce positive returns during these months, making the "Sell in May" strategy more anecdotal than a reliable investing rule.
In summary, the "Sell in May and go away" strategy is more a market myth than a rule backed by historical data. Markets including large-cap indices like the S&P 500 (and by extension, likely the FTSE 100 and MSCI UK) often produce positive returns over the May–October period. Investors following this adage risk missing out on gains during periods that are often profitable. The pattern is influenced more by seasonal investor behavior and cognitive biases than by consistent market downturns. Therefore, based on historical performance evidence and expert analysis, the strategy lacks strong empirical support for the MSCI UK index and FTSE 100, aligning with global findings on seasonal market behavior.
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