Why Investors Didn’t Need to “Sell in May” This Year
So May is almost over, and most markets around the world are up, putting the notion of ‘sell in May and go away’ in question. The facts are simple, while there are tendencies of price behaviour at certain times during the year, it is by no means enough to base your entire investment strategy on.
I wanted to follow up on the failed head-and-shoulders pattern we highlighted a few weeks back with a comment on seasonal patterns. This week’s chart shows two very long-term seasonal charts. To create the seasonal pattern, we label each week of the year 1-52 and we take an average of the weekly gain or loss over time. The white line is the annual seasonal pattern from 1928 when we have daily price data for the S&P (large cap) 500. Prior to the early 1960s, the index was not 500 stocks, but still represented the largest stocks of the day. The orange line is the average price during the fourth year of the presidential cycle.
As one can see in the picture, the next month or two tend to have a positive seasonal pattern and the idea of sell in May and go away really is more like sell some time at the end of Q2 and buy some time in late Q3 or early Q4. While it’s true that from the May peak to the October low we generally do not see much growth, it implies a weak period of average growth compared to Q4 and Q1, where most of the growth tends to happen.
The current market valuation is quite high with a trailing multiple of 19.4x earnings. Forget the forward multiple at this point because seven years into an expansion, looking for 13 per cent earnings growth is, well, likely to disappoint to be kind. So while the seasonals are positive for the next few months, chasing the market higher is a lower probability. We should expect the next high volatility period to emerge as we get closer to the U.S. election.
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