This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Mack Courter, founder of Courter Financial in Bellefonte, Pennsylvania.
In April of every year, we see dozens of articles urging us to sell in May and go away. In its basic form, you sell stocks on May 1, and you buy them back on Nov. 1. The strategy is credited to the respected Yale Hirsch of the Stock Trader’s Almanac, who began covering it in 1986.
Hirsch observed that stocks typically do much better in the six months between November and April (strong period) than they do between May and October (weak period). But is this really an effective strategy?
At first blush, it seems to have merit. Most stock market crashes occur between May and the end of October.
The flash crash, in which the Dow Jones industrial average surrendered almost 1,000 points in minutes, occurred in May 2010. During the Great Recession of 2008, the S&P 500 plunged more than 16% in October 2008. Black Monday, the largest stock market crash in U.S. history, happened in October 1987. The Great Depression was ushered in by the stock market crash on Black Tuesday in 1929, also in October.
Comparing The Strong vs. The Weak Period
I recently examined the S&P 500 monthly returns using Ibbotson Associates data through the end of 1998, and the SPDR S&P 500 ETF (SPY) since then. The S&P definitely performs better November through April than it does May through October. From May 1972 through October 2016, there have been 45 May through October periods and 44 November through April periods.
You can see in Exhibit 1 that there have been more positive periods in the strong six months as opposed to the weak six months:
The differences are starker when comparing the average return for the S&P 500 in the strong periods compared to the weak ones in Exhibit 2:
During November through April, the S&P 500 has returned 8.05% on average. But during May through October, the index has returned only 2.94%.
But, you will point out, even though the average return is not as good during the weaker six months, it is still positive. So if you sit on the sidelines from May through October, it appears you’ve lost almost 3%.