Why ‘sell in May and go away’ could be the worst strategy this year
May to October is traditionally a weak period for stocks, hence the maxim advising investors to take their money out and return in the fall.
This year with markets roaring to new records and the TSX up 10% to start the year and up 70% from the lows of March, 2020, many investors are thinking now might be a good time to take their money and run.
They might want to think again, says BMO Capital Markets chief investment strategist Brian Belski.
Belski points out that since 1990 this season has been positive for 74% of the years when the market had a strong start to the year, as it did in this one.
“Indeed, while the sell in May strategy may be tempting for investors looking to take profits, our work shows this strategy has limited effectiveness. As such, we believe investors should remain invested and avoid using this seasonal pattern for long-term investment strategies,” he said.
The COVID-19 pandemic has produced one of the fastest post-bear market rallies on record, and this has unnerved some investors, worrying stocks have overextended themselves.
But Belski says history again suggests this rally has further to run. Historically post-bear market rallies have averaged 632 days before the first correction and have posted over 70% returns on average. The last three such rallies have averaged 860 days, seeing almost 100% return on average. That compares to the TSX’s current rebound which is 400 days old and up 70% from its low.
BMO sees the TSX hitting 19,500 by the end of the year and recommends being overweight in consumer discretionary stocks, financial, industrials and materials. It recommends underweight in real estate and utilities.
“We believe that just because the pace has been quicker than historical averages, it does not imply the rally is nearing a peak. In fact, our work suggests there is still plenty of room in this post-bear market rally based on historical performance patterns.”
Volatility is another concern, but Belski says while some mild price weakness tends to occur when volatility rises, it is often short lived. “In fact, we believe a stabilization of volatility is ultimately healthy as the market transitions back to normalcy,” he said.
BMO’s view on U.S. stocks is much the same, with analysis showing that the performance of stocks in May to October improves when the year gets off to a strong start.
Not everybody agrees.
Mark Yusko of Morgan Creek Capital Management told CNBC this week that inflation risks could give markets a bumpy ride this summer, and that ‘Sell in May’ might be a good idea.
“There will be places to hide, but generally speaking, I think the markets will be pretty volatile through the summer and into the fall and you’re just better off to raise some cash, kind of sit it out and then buy some things on sale in the fall,” Yusko said.
But BMO believes the buy and hold strategy that has fallen out of favour in recent years works best because trying to time the market is extremely difficult and “even the slightest missteps can have a significant performance impact.”
That has proven true in what is turning out to be the ‘unchartable’ 2021 stock market, according to Bloomberg.
When applied to the S&P 500, the majority of chart-based indicators tracked by Bloomberg have lost money. All are doing worse than buy-and-hold, which is up 11%.
Avoiding the stock market for any period of time has proven the riskiest of all. The S&P 500 has yet to fall back more than 5% this year, but missing out on the big days has hurt even more. Without the top five sessions, the index’s 11% gain dwindles to 2%.
“To try to guess that this is the right time to be out of the market, you may as well go to Las Vegas,” said Mark Stoeckle, chief executive officer at Adams Funds told Bloomberg. “There’s just as much risk doing that.”