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Should you “Sell in May and Go Away”?

The “Sell in May” effect is the tendency over recent years for US equity markets to perform poorly during the summer months (defined as May-October) relative to the winter months (November-April). In this article, we take a closer look at the Sell in May effect to understand whether investors should incorporate this particular market timing strategy when making investment decisions.

Every May, articles are published in the popular press on the dreaded Sell in May effect, warning of lower equity returns over the next few months. In academic research on this topic, Bouman and Jacobsen (2002) find summer equity returns for most major international markets are lower than winter returns. A related paper by Kamstra, Kramer and Levi (2003) provides an explanation for this effect. In their explanation, they link risk aversion levels with the amount of sunlight using a psychological condition called seasonal affective disorder. The day of the year with the most sunlight for countries in the Northern Hemisphere is June 21 (See Exhibit 1). As sunlight is reduced over the summer and fall, the authors explain, investors become less willing to take on risk. This increase in risk aversion drives investors to sell out of the market during the summer, pushing prices lower. When the days start getting longer again, risk aversion decreases and investors return to equity markets.

Exhibit 2 reports monthly average and six-month trailing returns by calendar month over the period November 1926 October 2013 using US Market CRSP 1-10 index returns. Similar to prior academic literature, summer months are defined as May, June, July, August, September, October, and winter months are November, December, January, February, March and April. September is the worst performing month, -0.71%, and the only month with a negative average return. October returns (0.36%) are also quite low. The returns are highest in December (1.79%), January (1.57%), and November (1.48%). Over this relatively long period, summer months (May, June, July, August, September and October) buy-and-hold average returns are 4.35% compared to 7.86% for winter months (November, December, January, February, March and April). In sub-periods reported in columns 2-5, the summer return is only higher than the winter return in the earliest period (1920-1949).

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Gerstein Fisher
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