May Day!

Story Highlights:

• Annually at this time, calls to "sell in May and go away" are easy to find.
• Perhaps the rhyme makes this catchy, but evidence of effectiveness is lacking.
• Historically, stocks rise two-thirds of the time in summer—about in line with long-term averages.

As summer nears, excitement grows for warmer times and for… market doldrums? Like the Phoenix, the old but erroneous investing adage "sell in May and go away" is again rising from the ashes. Apparently last summer's 25% summertime return did little to dissuade this myth's adherents. Oft repeated, this is a common tenet of schools of thought that believe the Julian calendar impacts market returns (to the exclusion of other calendars in use globally).

The practice varies—some proponents argue that selling stocks in May and re-entering after August is correct. Some September. Still others, October—meaning fully half the year is unsuitable for investing.

Maybe people cling to the rhyme—it's catchy, we'll give them that—but in practice, the theory fails as a timing tool. Supporters look hard and wide to find correlation—and tweak criteria like reentry dates until it fits the saying. To one degree or another, positive or negative, there's correlation between most items. For example, if ice cream consumption and violent crime are both up, there's positive correlation! Would anyone argue that Mint Chocolate Chip causes home invasion, though? It's simply false correlation, or correlation without causation. Proponents of seasonal investing fall prey to this frequently—mining a couple of years that agree, to the exclusion of the multitude that don't.

If the scientific method is properly applied (experimenting to disprove the theory, not prove), then believers may rapidly become non-believers. Whether selling April 30 and returning after August, September, or October global stocks average nicely positive returns for summer: +5.0%, +6.0%, and +9.0% annualized respectively.* Moreover, if "away" means holding cash, then consider that today six-month CDs range from 0.40-1.28% on average. Further, akin to equities' long term average, stocks are up in the summer months approximately two-thirds of the time! And some summers, like last year, are simply spectacular times to invest.

Missing the summer months in the stock market is something most investors can't afford. Growth-oriented investors should only "go away" from the market when they foresee some big, bad, and ugly bear market-inducing event on the horizon other investors don't see coming. We're pretty sure most investors are aware May follows April, so the "sell in May" adage isn't catching anyone by surprise. Myriad myths about investing exist today, but as theories, rigorous testing is required. "Sell in May and go away" is a nice rhyme, but costly in practice. So don't stop research at the calendar—deeper digging is required. If seeking a rhyme, try Dylan Thomas—his work is superior and cheaper.

Source: Global Financial Data, Inc.