Seasons of the stock market

Wall Street is full of adages — “buy low, sell high,” “a rising tide raises all the ships” and “sell in May and go away.” Since it’s May it makes sense to take a closer look at this last one.

When I first heard the phrase “sell in May and go away” I naturally wondered what the calendar had to do with how the stock market performs. Often referred to as “market seasonality,” historical data bears the phenomena out.

In the months of November through April, the U.S. stock markets tend to perform much better than they do during the May through October time period.

In fact, according to the Stock Trader’s Almanac, if you had invested $10,000 in the Dow Jones Industrial Average on May 1 and sold it on Oct. 31 each year since 1950, you would have lost money. That 61-year investment of $10,000 would only be worth $9,261 today. However, if you had invested that same $10,000 on Nov. 1 and sold on April 30 of the same years, your investment would have grown to almost $610,000.

Said differently, all the gains in the Dow Jones Industrial Average since 1950 have occurred during the seasonally strong months. That’s a difference that merits some consideration.

Many people ask how can this be or look to determine what drives it. The most common explanation is that corporate earnings cycles or trading volume drops during the weaker summer months due to vacations. Another explanation is that stock funds try to improve year-end results by pushing prices higher at the end of each year. In addition, there’s a feel-good effect that occurs over the holidays in which moods tend to be positive and the time-off lets investors focus and make investment decisions. My point isn’t to focus on why it happens, but rather that it does happen.

While market seasonality warrants consideration in your investment planning, it’s important to recognize that it’s not foolproof. Seasonal investing relies on probabilities, not certainties, and, from time to time, there are shifts in patterns, mostly over short periods, where a seasonal strategy yielded negative returns. It should not be your exclusive tool to make investment decisions but rather another arrow in the quiver of investment knowledge.