‘Sell in May and Go Away’: Mostly a Myth, but Not Entirely
The stock market’s famous six-months-on, six-months-off pattern—known alternately as “Sell In May and Go Away” or the Halloween Indicator—is more than a superstition. But not by much.
To be precise, according to a new study, there is evidence that the phenomenon of stocks performing better in winter than in summer does tend to occur. However, almost all of the advantage comes in the third year of presidential terms. Otherwise, the seasonal difference is so weak as to be statistically nonexistent.
These are the implications of research now circulating by Kam Fong Chan, a senior lecturer in finance at the University of Queensland in Australia, and Terry Marsh, an emeritus finance professor at the University of California, Berkeley, and CEO of Quantal International, a risk-management firm for institutional investors.
Consider the Dow Jones Industrial Average back to 1896, when this indicator was created. In the first, second and fourth years of all presidential terms since, there was just a 1-percentage-point difference between the Dow’s average winter and summer returns—3.3% versus 2.3%. Given the considerable variation in the year-to-year results, this difference turns out to be not significant at the 95% confidence level that statisticians typically use when determining whether a pattern is genuine.
Third years are the exception. During such years over the past 12 decades, there was an 11-percentage-point difference between the stock market’s average winter and summer. That spread is highly significant statistically.
Another implication of this new research is that there is no reason to get out of stocks most summers—including this coming one. The Dow rose in three of the four summers during Barack Obama’s second term, by an average of 3.9%. The third summer was the exception.
The researchers became even more confident in their conclusions after searching for the Halloween Indicator in the stock markets of several foreign countries: Canada, France, Germany, Italy, Japan, Britain, Australia and Singapore. Just as in the U.S., the seasonal difference in other countries’ stock markets was most pronounced in the third years of the U.S. presidential term but was otherwise not statistically significant.
What might cause the stock market to perform so much better in the winters of presidential third years than in the summers of those years? The professors offer only a conjecture. They point to a 2013 University of Chicago study that created an index measuring uncertainty surrounding economic policy. That index turns out to be highest in the winter months of presidential third years, on average. Drawing on standard principles from Finance 101, they reason that the stock market may well be providing a higher return during those times to compensate investors for the greater uncertainty.