Stock returns slow in May, but why?

Pittsburgh Post-Gazette By Tim Grant May 1, 2015

Wall Street seems to have an adage for nearly every occasion. Investors are warned that bulls can make money. Bears can make money. But pigs get slaughtered. And of course, you should never fight the Fed.

There is one Wall Street saying that is particularly relevant this time of year: “Sell in May and go away.”

The idea behind that advice is that many in the financial industry are convinced the best stock market returns are usually reaped from November to April. Many industry players also believe investment returns are lower from May to October.

“Is there a clear reason to sell in May and go away? Our position is no, there isn’t,” said Robert Hapanowicz, president of Hapanowicz & Associates, Downtown. “There’s still a positive rate of return.

“Yes, there is increased volatility in that six month period of time [after April]. However, for long-term investors, selling in May is probably not the right thing to do.”

Intrigued by the “sell in May” concept, a team of academics in the department of finance at the University of Miami decided to subject the adage to some cold, hard academic scrutiny.

They found on average, across markets and over time, stock returns are roughly 10 percentage points higher in the November to April six-month period than from May to October, based on their study of MSCI stock market index total returns in local currency for 37 countries from 1998 to 2012.

MSCI is a New York-based investment research company.

“This result is quite remarkable in light of the fate of most such calendar anomalies subjected to subsequent scrutiny,” they wrote, suggesting that other calendar-related Wall Street trends did not hold up as well.

It prompts the question: Why would stock market returns trail off starting in May? The answers depend on who you ask.

“Some people speculate that maybe after May people are just focused on other things such as warm weather, outdoor activities and vacations,” said Bernard Carter, chief investment strategist at Hapanowicz & Associates. “Is there proof behind that? No. But it sounds reasonable to me.

“Stock market profiteering is an indoor activity. It’s a wintertime activity. You don’t do that outside.”

Adam Yofan, president of Alpern Wealth Management, Downtown, said there is no reason — mathematically speaking — for markets to go up or down at a certain time.

“What might occur is if traders or people who would usually be buying are at the beach on vacation or not working,” he said. “If the demand is not there, prices should fall based on economics.

“You can look at data. But really there’s no rhyme or reason,” Mr. Yofan said. “The market is full of people who try to time the market based on this or that adage. If there was a foolproof way of timing the market, everybody would be doing it.”

Not everyone is convinced there’s a reason to be leery of the stock market after April. Russ Zalatimo, managing partner at HudsonPoint Capital in Edison, N.J., believes the “sell in May” adage is no longer relevant.

“Over the last six years, the market was up for three years after the month of May and down the other three years for the same period,” Mr. Zalatimo said.

“What’s important to note is that volatility and volume drop during this period, and typically do not return to prior levels until the fall. I attribute this to people’s lives having too many distractions this time of year.”

Cameron Short, an adviser at Stifel Nicolaus, Downtown, also is not a fan of getting out of the market each spring.

“I always thought September was the worst month statistically, and I only remember that because my birthday is in September,” he said. “If you decide to trade based on seasonal factors, you better have stronger empirical evidence than seems to be available today.

“Meaning, I don’t think the markets have given us enough statistical evidence to make a strong case for this trade. In today’s markets, trends that are tradeable seem to be exploited very quickly. That doesn’t seem to be the case with this trading strategy.”

Tim Grant: tgrant@post-gazette.com or 412-263-1591

 

http://www.post-gazette.com/business/money/2015/05/01/Stock-returns-slow-in-May-but-why/stories/201505010104