Markets & Stocks
Sell in May...and go away
A summer vacation from stocks, the old saying goes, works wonders for returns. It could be true.
May 1, 2003: 4:54 PM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - It's a brand new month, and Wall Streeters are celebrating it in traditional fashion: frolicking around the maypole and thinking it was getting near the time to get out of stocks.

"Sell in May and go away," is how the saying goes. With everyone off to the beach, summer can be a dreary time on Wall Street. Early fall too -- October has received a (not entirely deserved) reputation for being horrible. So the idea of exiting the market in May and coming back when October comes to a close has -- like the Super Bowl indicator and the hemline theory -- gained adherents over time.

Pretty dumb, right? What could the time of year have to do with how the market performs?

Everything, it turns out. Over the past 50 years, from the end of October to the end of May the S&P 500 index has gained a cumulative 2,806 percent. That's not as huge a number as it may seem at first glance -- on a per year basis it comes to 7 percent. But for a little more than a half year's work for each year, it's better than a sharp stick in the eye.

Now, what would happen if you bought in May and sold at the end of October? The S&P 500's cumulative gain over that period for the past 50 years is 24 percent. On a per year basis this comes to just 0.4 percent. Worse than a bond, worse than a money-market fund, worse than a statement savings account, worse than the rate of inflation.

It could be just a statistical hiccup, of course -- flip a coin long enough and it will give you heads one hundred times in a row. But there may be other factors at work, besides chance. Flows into mutual funds and adjustments to company pension plans tend to take place in the beginning of the year, for instance. Squaring positions ahead of the light summer season makes sense -- especially if you're going on vacation. Selling for tax purposes often takes place in the fall.

And then there is just learned behavior -- once a pattern takes hold, people are apt to follow it. Why sell after Memorial Day? Because just like when we pull our white shoes out of the closet, that's what we've always done.

"The seasonal patterns are very clear and they can be a good guide," said Bollinger Capital Management head John Bollinger. "'Sell in May and go away' is generally correct, but not absolutely so."

Bollinger said that in more recent years the midyear top has come a few weeks later than in the past. He thinks investors should bide their time and see what the market does.

"I suspect we have a while to run before we hit the summer top," he said. "People should monitor events over the next week or two. Certainly by the time that June starts to unwind an urgency to sell should be there."

Key indicators?
January, hemlines, the Super Bowl
Hello, Wall Street: Minis are back
Bracing for October

Beyond the seasonal factors, one can construct a decent scenario where getting out of the market for the summer makes sense.

With signs that the economy and earnings have got through their rough patch, enthusiasm over a rebound has mounted among investors. But just because things don't look horrible anymore doesn't mean they're going to go great guns. Economists surveyed by Blue Chip Economic Indicators believe the economy will grow by an annualized 2.2 percent in the second quarter, 3.6 percent in the third and 3.8 percent for the fourth quarter. Nice pickup, and let's hope they don't revise it down again.

Expectations for earnings growth too are just way too rosy, according to Brett Gallagher, head of U.S. equities at Julius Baer Capital Management. Industry analysts polled by First Call are looking for great things from bottom lines. After a growth of 6.2 percent, year over year, in the second quarter, they expect earnings growth of 12.6 percent in the third quarter and 21.3 percent in the fourth.

"Things are getting better, but the magnitude of the improvement is not enough to drive the kind of market reaction we've had," he said. "At some point people are going to realize that and the market is going to come under pressure."  Top of page

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