The Stock Market in May

Sell in May?

One of the most famous adages in the stock market is “sell in May”. And often this can be good advice. However, look at the accompanying chart ­ you can see that the UK equity market has actually had positive returns in May for the past four years! Admittedly, last year the FTSE All-Share Index saw a rise of only 0.2%, but that’s still a positive return.

Monthly returns of FTSE All Share Index - May (1984-2016)

In fact, since 1984 the market in May has seen roughly an equal proportion of positive and negative month returns (the proportion of years with positive returns in May is 51%).

So, why does May have a bad reputation for shares, and why is the saying “sell in May” so popular?

One reason can be seen in the chart. Although the proportion of positive and negative month returns in May are roughly equal, it can be seen that the positive returns in May are relatively small, whereas when the market falls in May it can suffer quite a large sell-off. Since 1970 the average market return in May has been -0.5%, which is the third worst record of all months.

The other reason why investors should take note of “sell in May” is that, longer-term, May marks the start of the under-performing half of the year (May through to October); a period over which share performance can tend to be lacklustre.

The average May

In an average May the market trades fairly flat for the first two weeks of the month, and then prices drift lower in the second half.

FTSE 100 v S&P 500

There are some months that the UK market fairly consistently outperforms the US market. May isn’t one of them. In fact, May is the weakest month of the year for the FTSE 100 Index relative to the S&P 500 Index; on average the UK index under-performs the US by 1.3 percentage points in May.

Diary

Coming up in May we have the May Day bank holiday on the 1st (LSE closed), the two-day FOMC meeting starting on the 2nd, US Nonfarm payroll report on the 5th, MPC interest rate announcement on the 11th, and Spring bank holiday on the 29th (LSE and NYSE closed).

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Sell in May (2017)

An update on the Sell in May Effect (also called the Six-Month Effect, or Halloween Effect in the US).

In the six months Nov 2016 to Apr 2017 (Winter period) the FTSE All-Share Index rose 5.2%. Previously, the Index had risen 10.1% over May 2016 to Oct 2016 (Summer period).

The out-performance of the Winter market over the Summer market was therefore -4.9 percentage points, which does not support the Sell in May Effect.

The following chart shows the out-performance of the FTSE All-Share Index in the Winter period over the previous Summer period since 1982.

Outperformance of winter over previous summer market [1982-2017]

In the 17 years since 2000 the Winter market has outperformed the previous Summer market 11 times, with an average out-performance of 4.6 percentage points.

As can be seen in the above chart, while in the longer-term the Sell in May effect is strong, in recent years it has become less reliable.

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Sell in May (2017)

It’s sell in May time again! 

And time for many articles appearing on whether to actually sell in May or not. So, should one sell?

The issue is a little tricky. It is certainly the case that equities over the 6-month period May to October tend to under-perform the November to April period. (We have covered this in many previous posts.)

However, just because the market under-performs May-October doesn’t necessarily mean that the market experiences negative returns over these summer months.

The following chart plots the 6-month May to October returns for the FTSE All-Share Index since 1982.

Market returns May to October [1982-2016]

As can be seen, since 1982 the market has actually risen more often than it has fallen over the May to October period –  equities have had positive returns in 20 of the past 35 years. The market has risen in ten of the last 14 years. And last year, 2016, the FTSE All-Share increased 10.1% May to October.

So, the case is not necessarily looking strong to sell in May. Especially, if one adds in the argument that being out of the market an investor will forego any dividend payments over the May-October period (and at a time when interest rates are very low).

An argument in favour of selling might be that, although the market often sees positive returns in the period, when the market does fall, the falls tend to be quite large. So, since 2000, the average return May-Oct has been -1.1%. Admittedly, this is quite heavily influenced by the fall in 2008, which might be regarded as something of an anomaly. But over the longer periods, the average returns are negative as well (-0.1% from 1982, and -1.0% from 1972).

In conclusion, whether to sell in May should likely depend on an individual’s attitude to risk and their transaction costs.


Further articles on sell in May.

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The Stock Market in May

It’s Sell in May time again. Already! Often stock market sayings turn out to be unreliable, at best. But the Sell in May aphorism is spookily accurate. It describes the tendency of the market to be weaker from May to October than it is for the other six-month period of the year. How true has this been? Well, in the last 33 years the saying has been right 28 times, and the average annual out-performance of the November-April period since 1982 has been 8.6%. Very few trading systems can match that record.

Monthly returns of FTSE All Share Index - Mayl (1984-2015)

Sell in May

Usually stock market anomalies, once they have been identified, don’t last long. But the Sell in May effect has been around for decades ­ one academic paper found evidence of it in the UK market starting from 1694. And the effect is currently as strong as ever. For example, for the latest period: the FTSE All Share Index was up 7.3% over the six-month period Nov 2014 to Apr 2015 and down 7.3% for the following period May 2015 to Oct 2015 (a rather oddly symmetrical performance!)

Given the strength of the Sell in May effect it is not surprising that May itself is one of the weakest months of the year for shares. There are only three months where, since 1970, the market has an average return of below zero in the month – May is one of them (the others are June and September). On average the market falls -0.2% in the month, and the probability of a positive return in the month is below 50%. Since year 2000 performance has been even worse, with an average return of -0.6% for the month.

It’s not immediately obvious why May has been historically weak for the stock market. The month is weak for most stock markets worldwide, so whatever the reason it’s unlikely to be anything UK-specific, such as the timing of the UK’s financial year.

The average market in May

On average in May the market trades fairly flat for the first two weeks of the month, and then prices drift lower in the second half ending with the weakest day of the year for shares on 30 May (although the LSE will be closed this year on that day for Spring Bank Holiday).

May is the weakest month of the year for the FTSE 100 Index relative to the S&P 500 Index; on average the UK index under-performs the US by 1.9 percentage points in May.

Stocks

Over the last ten years, strong sectors relative to the general market in May tend to be Aerospace & Defense, Electricity and Food Producers; while the weaker sectors are: General Industrials and Life Insurance.


Article first appeared in Money Observer

Further articles on the market in May.

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Last trading day of May

Tomorrow will be the last trading day (LTD) of May.

Since 1984 the market has on average risen 0.02% on the LTD of May, with positive returns in just 48% of all years, which makes it one of the weaker month LTDs in the year.

The following chart shows the FTSE 100 Index returns for every May LTD since 1984.

Last trading day of May (1984-2014)

 

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The Stock Market in May

May is one of the worst months of the year for the stock market. Since 1970 the average market return in the month has been -0.6%, with over half the years seeing negative returns in May. As can be seen in the accompanying chart, there have been a number of years when the market has experienced some sharp falls in May. Since year 2000, the situation has been barely better, the average month return has been -0.5%. This makes May the third weakest month of the year for stocks (after June and September).

Monthly returns of FTSE All Share Index - May (1984-2014)

It’s not immediately obvious why May has been historically weak for the stock market. The month is weak for most stock markets worldwide, so whatever the reason it’s unlikely to be anything UK-specific, such as the timing of the UK’s financial year.

For investors the great significance of May is that it is the start of the weaker half of the year (historically the market over November to April greatly out-performs the period May to October). This is flagged in the market with the famous saying, “Sell in May and go away…”. Some short-term investors, therefore, tend to reduce exposure to the stock market from May.

The average May

On average in May the market trades fairly flat for the first two weeks of the month, and then prices drift lower in the second half. The final trading day of the month, 29 May, has the distinction of being the weakest day for shares in the whole year.

Shares

Over the last ten years, strong shares relative to the general market in May have been: Cranswick, Babcock International Group, 3i Group, Severn Trent, and United Utilities Group. While relatively weak shares have been: Workspace Group, Petra Diamonds Ltd, Bovis Homes Group, Bellway, and Close Brothers Group

May is the third busiest month for results announcements with 52 FTSE 350 companies releasing their final results.

FTSE 100 v S&P 500

Internationally, May is the weakest month of the year for the FTSE 100 Index relative to the S&P 500 Index; on average the UK index under-performs the US by 1.9 percentage points in May.

Diary

On the economics front, the US Nonfarm payroll report is expected 1st May, and the MPC interest rate announcement on 11th May. The London Stock Exchange will be closed the 4th and 25th May. And the UK General Election will be held 7th May. Contributing to the “Sell in May” gloom, the election could also add a downward pressure on prices: in the month following a general election the UK stock market has historically had a negative average return.


Article first appeared in Money Observer

Further articles on the market in May.

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Average market behaviour in June

The following chart plots the average performance of the FTSE 100 Index during June since 1984 (more info on this type of char).

Average month chart - June (2014)As can be seen, historically the market has on average generally been flat for the first two and a half weeks of June, and then slides in the following week.

May 2014

The following chart shows the average performance of the market in May (1984-2013) and overlays the actual performance in May 2014.

Average month chart - May overlay May 2014 (2014)In May 2014 the market traded in-line with the historic pattern in the first part of the month: strong for the first 10 days, then weakening in the following few days. But in 2014 the market was unusually strong in the final week.

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Last trading day of May

Tomorrow will be the last trading day (LTD) of May.

As explained in the 2014 edition of the Almanac the LTDs of months used to be stronger than average, but in recent years they have been weak.

Since 1984 the index average return on the May LTD has been 0.04%, which is about same as the average daily return on all days of the year, and makes it the eighth strongest month LTD of the year.

The following chart shows the FTSE 100 Index returns for every May LTD since 1984.

Last trading day of May (1984-2013) [2014]

 

 

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Average market behaviour in May

The following chart plots the average performance of the FTSE 100 Index during May since 1984 (more info on this type of chart).

Average month chart - May (2014)As can be seen, historically the market has on average generally risen very gently for the first two weeks of the month and then sold off in the second half to finish down on the month.

April 2014

The following chart shows the average performance of the market in April (1984-2013) and overlays the actual performance in April 2014.

Average month chart - April overlay April 2014 (2014)

In April 2014 the market traded in-line with the historic pattern in the first and final two weeks of the month, but was abnormally weak in the second week.

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Strong/weak sectors in May

Strong sectors

The table below lists the FTSE 350 sectors that have historically out-performed the market in May.

Sector TIDM
Aerospace & Defense
Electricity
Food Producers
Gas, Water & Multiutilities
Tobacco

Weak sectors

The following table lists the FTSE 350 sectors that have been weak in May.

Sector TIDM
General Industrials
Life Insurance
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