Should Stock Market Investors Listen to the ’Sell in May and Go Away’ Anomaly?
SELL IN MAY AND GO AWAY STOCK MARKET ANOMALY – TALKING POINTS
- Historically-speaking, the Dow Jones experiences lackluster returns in May and summer months
- More recently, the ‘Sell in May and Go Away’ anomaly has deviated from the historical average
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The phrase ‘Sell in May and Go Away’ refers to the stock market anomaly coined by investors that suggests equity returns tend to falter beginning annually in the month of May – and statistical evidence from history tends to bear out that unusual norm. Another example of a stock market anomaly is the January Effect.
SELL IN MAY AND GO AWAY ANOMALY – DOW JONES INDEX RETURNS
As shown in the chart above, the Dow Jones Index has recorded an average return of -0.1 percent during the month of May and only a modest gain of 1.2 percent on average over May through September – the period often termed ‘the Summer months’ – dating back to 1928. This performance compares to other periods throughout the year like January through April (the ‘winter’ period) and October through December (‘fall’) which see average returns of 2.2 percent and 2.5 percent respectively. The median return for May and May through September are both lower than the returns inked during these other seasonal periods of year.
Drawing on historical context, a series of negative economic events have occurred during May and subsequent summer months which helps explain the lackluster returns during this time of year. For example, Greece was on the verge of defaulting on its debt in May 2010. Summer of 2011 saw the ECB stave off the Eurozone credit blowup by implementing its bond-buying program to save Italy and Spain. China slashed its GDP growth estimates mid 2015 as it announced plans to restructure its economy for more sustainable growth.
The history of financial crises details several additional events that proved bearish for equities over the years during May through September.
DOW JONES INDEX AVERAGE PERIODICAL RETURNS
However, stock market performance has begun to show a much brighter picture as of late and serves as evidence that contradicts the ‘Sell in May and Go Away’ anomaly. In fact, the Dow Jones 3-year average return for May through September is an impressive 6.5 percent while the 5-year and 10-year averages are also positive at 2.7 percent and 1.9 percent respectively.
One possible explanation for this could be the change in economic regimes witnessed by markets since the Global Financial Crisis. The theme that stands out most prominently over the last decade is the new era of quantitative easing (QE) and extremely low interest rates adopted by global central banks.
THE SELL IN MAY ANOMOLY AND CURRENT MARKET CONDITIONS
This new era of easy-money monetary policy has aimed at smoothing out the business cycle by providing loose financial conditions in hopes of encouraging business activity, bolstering asset prices and restoring market confidence. In turn, there have been less severe stock market drawdowns over recent times leading to higher average returns over shorter lookback periods.
That being said, there are still several unresolved market risks that loom – unsustainable debt loads, landing a smooth Brexit, uncertainty surrounding US trade policy with partners such as China, Canada, Mexico and the EU in addition to deteriorating global fundamentals shown by an uninspiring downtrend in economic indicators (just to name a few).
GROWING DEPENDENCE ON ACCOMODATIVE POLICY AND INVESTOR COMPLACENCY
Consequently, this new game of chess between global central bankers and the foundations of market cycle dynamics looks to be at its next pivotal tipping point. Investors have now grown accustomed to these accommodative policies and have ‘easy-money addiction’ withdrawals following any small shift towards tightening. Around the world fiscal policies remain accommodative shown by ballooning government deficits while central banks are shifting away from normalizing monetary policy.
Meanwhile, global equities remain elevated near all-time highs which makes it difficult to overlook the possibility of investor complacency. Placing such incredible reliance on government and central bank policies to completely eliminate business cycles has potential of proving to be a dangerous strategy, particularly if these already accommodative policies fail to instill market optimism.
In sum, while there are historical averages to fall back on to support this favorite investor parable, recent deviations and the wealth of fundamental risks that have arisen warrants less complacency and instead closer observation of the market’s developments as 2019 wears on.
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– Written by Rich Dvorak, Junior Analyst for DailyFX
– Follow @RichDvorakFX on Twitter