“Sell in May and go away.”
It’s one of the most well-known Wall Street sayings.
And it’s probably the first one I heard my boss and mentor Bill quote when I started my job at his hedge fund. (It’s possible Bill was using it to justify his summer hunting and fishing trips, but who knows…)
The stats seem to back this saying up.
There’s more than a century of data showing market returns have been much stronger from November through April than during May through October.
But does this mean you should sell your investments and take the summer off?
Today, I want to give you the real story behind this Wall Street folklore and make sure that you’re putting yourself in great shape to profit this summer.
Where the “Sell in May” Idea Came From
Looking back over decades of investing, it makes sense why the market would be weaker during the summer months.
For much of the 1900s, it was tradition for the big institutional traders to leave New York City during the summer and retire to vacation homes in the Hamptons.
Since much of the trading was done on the floor of the NYSE, the absence of these heavy hitters naturally led to less activity on the exchange and muted performance for stocks.
At the end of the summer, these investors would return to Wall Street and get back to business.
They would call clients and start pitching stock ideas again. And as these recommendations started generating buy orders, markets would surge higher.
Of course, there were differences from year to year. Not every summer was quiet and not every fall led to big gains.
But over time, this trend of low activity during the summer and more business during the fall and winter led to the “sell in May” proverb.
Just to be clear, the stock market hasn’t statistically lost money during the summer period.
This week, Bespoke Investment Group published a report showing that the average returns from May to October have been 3.6% while the average returns from November through April have been 8.7%.
So even if this historical trend holds up, you still wouldn’t want to be out of your investments every May.
If you took that route, you’d forfeit more than a third of your returns every year!
Technology Changes the Seasonal Trends
While we can understand why the “sell in May” concept may have worked in the past, Wall Street is operating a bit differently today.
Traders no longer fill the floor of the NYSE. Instead, the majority of trading and investing is done electronically.
Thanks to widespread internet connectivity, the biggest traders and fund managers are always in touch with what’s going on in the markets.
And it’s now just as easy to place a big trade on your smartphone as it is on a computer trading platform.
So the basic social dynamics that caused this trend to begin with have now changed.
Meanwhile, smart computer algorithms have also been used by just about all of the biggest trading firms to profit from predictable patterns like this.
If these algorithms figure out that markets are likely to be weaker during summer… stronger in the winter… or any other statistical situation, the computers automatically place trades to profit from the opportunities.
These computer trades naturally cause prices to rise or fall before the trends are supposed to take place.
And these “algo trades” effectively push stocks higher and lower in new ways that effectively offset the seasonal or timing trends that may have worked before.
Bottom line, due to technological advances and computer trading, the “sell in May” wisdom should have a giant asterisk next to it in our modern age.
Why 2021 Should Be an Exception to the Rule
Any time I hear someone say “this time is different,” I immediately feel myself becoming skeptical.
But given the fact that the “sell in May” wisdom is quickly becoming irrelevant and the different dynamics the market faces as we exit the coronavirus crisis, the summer of 2021 truly is different.
As the economy reopens, I’m seeing some very exciting opportunities in the market that should add some great returns to your wealth in May and the months following.
We’ve been talking about value stocks for some time here at Rich Retirement Letter.
These are stocks of companies that have reliable profits. And they’re stocks trading at a very low price compared to the level of earnings generated.
When you buy a value stock, you’re basically getting more for your money (just like a “value buy” when you’re shopping). These stocks typically give you:
- Less risk — because you’re already paying a low price for the earnings you receive.
- More income — because most value stocks pay reliable dividends and are trading at low prices compared to the income you receive.
- Better 2021 returns — because there’s a long-term investment shift back to value stocks which is helping drive prices of these stocks higher.
These are three great reasons to own stocks in this category.
And there are dozens of great companies to pick from in the technology, manufacturing, materials, housing, medical, real estate, retail and plenty of other industries.
As we head into the May through October “soft period” for markets, these names are picking up momentum and driving the overall markets higher.
It’s a trend that should gain momentum as the global economy reopens.
And it can make you a lot of money as long as you ignore the “sell in May” conventional wisdom and stay invested in the quality stocks that have consistently added to your wealth in all seasons.