It's time for our annual screed on "Sell in May and go away." And this time, we're just going to get right to the point:

If you're thinking about unloading a few stocks because somebody, many years ago, managed to pair a seasonal trend with a clever rhyme …

That said, if you'd like to understand why we feel this way—and hear some market experts' thoughts on both the subject and stocks' current predicament this year—keep reading.

The Tea

As I've mentioned here before, Wall Streeters might seem like boring suits, but they have occasional moments of whimsy. They like silly stock-market indicators. And they love their folksy phrases:

"In the short run the market is a voting machine. In the long run it's a weighing machine."

"It's a market of stocks, not a stock market."

"There is always free cheese in a mousetrap."

WealthUp Tip: Forget market superstitions and folklore—make smart investments by learning through these research and analysis apps. 

That brings us to "Sell in May and go away," which refers to a historical phenomenon where the stock market tends to do its best work during certain times of the year. Specifically, stocks tend to be most productive between November and April, but tend to take their foot off the pedal between May and October.

So the full implied advice from this phrase is "Sell your stocks on May 1 and go away until Nov. 1, at which point you should buy back your stocks until the following May." But that doesn't roll off the tongue quite so well, so here we are.

Catchy as the phrase might be, however, it's a horrid piece of advice for the vast majority of investors.

The Take

The first red flag shows up in the saying's own origins. 

You see, "Sell in May and go away" is actually a shortened version of "Sell in May and go away, do not return until St. Leger's Day." This phrase was slung around by British stock brokers to refer to the summer vacation stretch between May and the end of the horseracing season—which was marked by a race on St. Leger's Day in mid-September.

In other words, it didn't originate so much as a warning of bad returns, but as a reminder of when to grab the sunscreen … and the stock market was likely tamer without as many people on the job.

Since then, the time frame has morphed (with the phrase now including all of September and October), and the saying has picked up a nastier connotation—not without some good reason.

"Since 1950, approximately 60% of negative monthly returns, including corrections of greater than 10%, occurred during the May to October period, which helps add credence to the Sell in May strategy," says Manulife Investment Management. 

Not to mention, the market has absorbed some of its most brutal hits during this period. Black Monday (1987). The post-Lehman crash (2008). The crash of 1929 and the post-World War I auto bubble burst both began during the summer. The 2010 flash crash was in early May (OK, we got most of that back in minutes.)

"Furthermore, the average May-through-October return has underperformed the average November-through-April return over the previous five, 10, 15, and 25 years, since 1990," adds Gene Goldman, Chief investment Officer at Cetera Investment Management. (All data cited by Goldman are total returns—price plus dividends—and are through April 25.)

But these numbers don't tell the whole story.

Sell in May? "Nah," The Numbers Say

Has the November-to-April period historically outperformed May-to-October? Absolutely.

But that doesn't mean those summer and fall months have been entirely unproductive.

"General guidelines like 'sell in May and go away' haven't worked out most of the time," Goldman says. "[Since 1990], the November-to-April time frame has done better, with an average annual return of 8.2%, positive 82% of the time. [But] the S&P 500 had a positive total return 77% of the time over [the May-to-October] six-month stretch. The average return was 3.5%."

Recent seasonal returns have been even less convincing.

"Sell in May hasn't worked much at all lately, so don't get too worked up over it," says Ryan Detrick, Chief Market Strategist at advisory firm Carson Group. "Over the past 10 years, those 'worst six months' of the year you are about to hear a lot about have been higher eight times."

The idea of "Sell in May" does have at least some interesting tendencies depending on what the market has done prior to the start of May.

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"Some of the worst Sell in May periods have taken place when stocks were already off to a rough year," Detrick says. "Given stocks are up YTD this year, that is another potential positive.

"Up 4% YTD (like '24 might be)? Things get even better."

And both Detrick and Goldman note that the May-to-October period has been fairly fruitful when Americans are getting ready to elect their next president.

"Summer rallies and strength during these six months is quite common during election years," Detrick says. "In fact, they're up nearly 78% of the time."

Selling All Your Positions in May? It's Yourself You Will Play

Here are four more reasons why taking "Sell in May" literally will bite you in the derrière.

1. More Fees: Mutual funds virtually always charge annual management expenses, and they sometimes charge initial sales loads on your first purchase. But did you know that some of them take out more fees when you sell? So unloading and reloading your mutual fund holdings could end up racking up numerous unnecessary fees.
2. Less Dividend Income: Let's say you bought a stock five years ago at $100 per share and it paid $5 in annual dividends. Your yield was 5%. Since then, the stock has doubled to $200 per share, and the dividend has doubled to $10 per share. Your "yield on cost" (the yield at the price at which you bought shares, which is still $100), is now 10%! If you sell those shares in May for $200, then buy them back in November at around the same price, your yield will drop back down to 5% ($10 dividend / $200 per share = 5% dividend yield).
3. More Taxes: If you invest in a taxable brokerage account, and you sell in May, any gains you've locked in are subject to capital gains taxes! If you buy and hold a stock in a taxable account, you'll typically only pay taxes on any dividends and distributions you collect in a given year—typically a small sum. But when you sell, if you made a profit (or a "capital gain"), you'll need to pay taxes on those capital gains. And worse? If you do "Sell in May" every year, that means you're holding all your stocks for less than a year, which means you'll have to pay at much higher short-term capital gains rates!
4. More Hassle: Let's say you have a portfolio of 20 holdings—some stocks, some exchange-traded funds (ETFs), and some mutual funds. Now imagine going into your brokerage account, going through the process of selling each one of them, then setting yourself a reminder to come back in a few months and buy them all back again. Then imagine doing that every year. Not fun.

But Hey, Could It Happen This May? Who Are We to Say?

Of course, the market doesn't operate in a bubble of statistics. It could just so happen that "sell in May" might work out this year not because of seasonality, but because of how the market is set up.

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"I am confident that this pullback will continue as risks are increasing due to the Fed being quiet this week (and uncertainty about Fed action), high valuations pricing in perfection, and the surge in energy prices and bond yields," Goldman says about the market's recent weakness. 

But even then …

"I do think any weakness, pullback, or correction should be short-lived given the expected 11% earnings growth expected in 2024 and the $24 trillion of cash on the sidelines," he says. "I would envision a quick correction like we saw in October last year."

That said, there are ways you can prepare for potential seasonal (or any!) stock-market weakness without tossing your portfolio to the curb.

"Seasonality is a fluky thing, but it might behoove investors to consider how to apply more defensive strategies," says Steve Sosnick, Chief Strategist at Interactive Brokers. "To that end, dividend-paying stocks—specifically those whose cash flows support steady payouts—offer downside protection while still allowing participation in a broadening market. Think of dividends as providing ballast to one's portfolio. 

"While the sexiest investments this quarter have tended to be those with low payouts (like tech stocks) or no payouts (like bitcoin and gold), if we're considering strategies for a sideways or rocky market, dividends become much more appealing."

And that’s all we have for you today. We hope you enjoy your Saturday. Now get out there and slay.

Riley & Kyle

WealthUp

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