E Seasonal Patterns In Shares – Why Do Investors “Sell In May And Go Away”?

“Sell in May and go away”. It’s an old piece of Wall Street folklore that invariably does the rounds each year as we approach the summer months. It suggests that traders should sell their equities in May, and come back around late October, and traces its history back to the days when the City of London stockbrokers left their desks to enjoy the summer season, culminating in the St. Leger horse race festival in September. 

Here, conventional wisdom would suggest that stock markets are sluggish during the summer, and tend to gain again throughout the winter – but is this still the case?

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‘Tis the season

A wealth of data, collected over many, many years would suggest so. From 1950 to around 2013, the Dow Jones Industrial Average has had an average return of only 0.3% during the May to October period – this is compared to average gains of 7.5% throughout November to April. Although many investors might be keen to dismiss the old adage as nothing more than an old wives’ tale, the evidence builds a strong case to suggest it is more than just an empty phrase.

While there will of course be some exceptions to the rule, the truth is, human beings are predictable – when faced with investment decisions year-on-year, we tend to behave habitually. The key here is that investor demand for shares will vary throughout the year, relative to the supply. A number of recurring events can contribute to this, as well as changes in market sentiment. So, what patterns should investors be monitoring throughout the year?

To begin with, it’s important to note that the turn of the seasons can literally affect the price of commodities. Seasonal weather patterns – such as droughts and blizzards, for example – and harvest periods can cause valuations to peak and trough. Looking to the past, the value of natural gases tends to dip from around mid-June (during the warmer summer months) as there is less of a demand of heating in the Northern hemisphere. 

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William K. 3 months ago Member's comment

Given the apparent affects that emotions tend to have on a lot of the market, it seems that the optimism of spring would tend to boost share prices which would in turn to encourage profit taking, which normally involves selling. So the saying could be based on past performances. Clearly it would not apply universally, but that is not required for traditions.

Giles Coghlan 3 months ago Author's comment

The flows into stocks tend to be highest in the winter months and tail off in the summer ones. So, historically speaking, there is less inflows into equity markets around the summer months. The current huge amounts of stimulus from Govt's and low rates from central banks have been boosting equity prices even over the recent summer months. Key meeting tomorrow with the Fed.