“Sell in May and go away,” you hear it each and every year and every time we ask ourselves if it’s good advice or not. Investors and traders are always looking for elusive patterns in the markets that other people haven’t noticed yet so that they can get an edge on the competition.
In the coming weeks, you’re probably going to hear it again and again. The traditional wisdom behind the phrase is that markets tend to become more volatile in the summer months, and there’s good reason behind it. For one thing, people in general are more volatile in hotter climates.
Numerous studies have been done that point to this conclusion, and it stands to reason that impulsiveness of all kinds- not just violence- would correlate to the summer months. Summertime volatility is usually associated with lower participation, but the analogy holds well enough anyway.
Proponents of the old adage suggest that selling stocks at the end of April and staying clear of the markets through October will render the best annual returns. They, in fact, refer to avoiding the market entirely during this “typically volatile” May-to-October time period.
As it goes, we are told that you generally have until the end of May to safely offload your stocks and holdings before things begin to become unpredictable. However, just as the globe is warming- the markets also seem to be growing more in volatility- with greater ranges in peaks and troughs and longer periods of unpredictability.
So, while the old adage is backed up by overarching statistics that cover all markets, it could well be that the period during which caution is the prescription has grown longer. Where the time for distancing one’s self from the markets was once April to October- it may well now be May to November.
So what’s behind the change? It could be the effect of algorithmic trading, expanded global accessibility, nervous investors looking to stow their nuts away for winter, lingering fears from the 2008 recession- or what have you. Whatever the cause, it seems the “summer slump” has expanded its borders.
For whatever reason, in the six years following the 2008 collapse, the month of May has gone from being the best month for trading to nearly the worst. The period between 2008 and 2015 has yielded average losses hovering just over 3 percent for the month of May while November- traditionally the time to jump back into action- has been performing below expectations with average returns of around 1.1 percent.
So the adage seems to hold true, which is good news for strident traditionalists looking to sell advice. But the shift is urging traders to start selling toward the beginning of the month of May rather than lazing around until the end of it. If you’re feeling skeptical, just look at the Fed’s data dependent nature which spurs increases in volatility in US economic reports- so while June approaches, the more uncertainties develop.
What’s Brexit got to do with it?
There’s a lot of anxiety surrounding the growing urgency felt by the UK to pull out of the European Union. President Obama’s questionable rush to head across the pond to lecture the English on how important he thinks it is that they should stay in seemed to have the opposite of the intended effect.
Rather than slavishly nodding their heads, they seem to have been put off by it. Now, with growing support globally, the “Brexit” seems to be a looming inevitability.
Sterling fell precipitously after a date was announced for the UK’s referendum on whether or not to remain in the EU. Many leading experts claim there is a strong possibility that the Brexit would trigger even more volatility in the financial markets as well as the broader European and US economies.
There is nearly a consensus in the Center for Macroeconomics survey to the effect that Brexit question alone will cause financial volatility to increase across the board and impose numerous costs in the medium and long terms.
Speculation alone makes Brexit-related financial volatility all but a certainty, and it can be expected to be especially tumultuous should polls on the issue remain too close to call. The absence of certainty about the UK’s economic standing with the EU following Brexit are going to be the main concern in the coming months.
Whether its lingering instability from the 2008 recession, fears over Britain’s exit from the European Union, or something to do with hot heads in hot weather- it remains clear that sitting on your investments till the end of May this year probably isn’t best for the health of your portfolio.
Regards,
Ethan Warrick
Editor
Wealth Authority
