How the Election May Affect the ‘Sell in May’ Adage

Increasing market volatility over the past few weeks that has been tied to higher interest rates and rising geopolitical unrest, among other issues, might appear perfectly timed to the old Wall Street adage, "sell in May and go away."

Historically, the notion of exiting the equity markets in May and returning in late October has shown promise even if it does technically qualify as that nasty practice of market timing. Financial advisors are not always on board with such strategies.

“The rules of thumb always work, until they don’t,” said Tim Holsworth, president of AHP Financial in Midland, Mich.

The problem with moving out of the market, he adds, is determining when to move back in. Then there’s the issue of charging fees on idle cash.

“If that’s the strategy, will clients agree to a management fee while their assets sit in cash?” Holsworth said.

But the idea of avoiding markets during the slower summer months spurs curious speculation among investors every year at this time, leading to heightened volatility and some gains. 

According to a breakdown by Schaeffer’s Investment Research, since 1948 the S&P 500 Index averaged a 1.83% increase during the 76 May-to-October periods. That compares to a 6.85% average gain for the 77 November-to-April periods.

A full 66% of the May-October periods were positive and 77% of the April-November periods were positive.

Election Year Factors

Regardless, the broad averages make an easy case for going to cash and heading off to the beach for a few months.

But before you swap those shiny dress shoes for flip-flops, you might want to consider the added wrinkle of a Presidential election year.

According to Schaeffer’s research, the S&P’s average six-month return leading up to a Presidential election in early November is 4.67%, which compares to 2.14% in non-election years, and 0.95% in mid-term election years.

What makes the case for staying put even more compelling is that election-year volatility, as measured by standard deviation, is only slightly higher than non-election years.

Diving deeper into the research, the S&P’s average six-month return leading up to a Presidential election when an incumbent is on the ballot makes a strong case for staying fully invested.

During the 11 six-month periods when an incumbent was running for re-election, the S&P produced an average gain of 7.57%, which compares to an average gain of 0.69% without an incumbent on the ballot. And on the way to getting that better performance, the market volatility was nearly five standard deviation percentage points lower when an incumbent was running.

Paul Schatz, president and founder of Heritage Capital in Woodbridge, Conn., is not a fan of selling in May for a host of reasons.

“It worked better the further back you test it, but less so this century,” he said. “It also depends on the election cycle and whether stocks are in an uptrend or downtrend.”