Think 20/20 Research

While many people greet the month of May with an improving disposition as the spring weather brings cheery wishes of Happy May Day and Cinco de Mayo, investors both personal and professional tend to greet May with more caution. The adage most commonly associated with this month is “Sell in May and go away.” This refers to the notion championed by Jeff Hirsch, editor of the “Stock Trader’s Almanac,” that stock returns lag in the summer months and that investors are better served investing in the November to April period.

This week’s abrupt downdraft in the stock market has many wondering whether the adage will hold true once again. Before we delve into that, let’s put some perspective around this adage. Mr. Hirsh’s support for “sell in May and go away” centered on his findings from analyzing the Dow Jones Industrial Average (DJIA) from 1950 through 2008. Over that period, he found that it gained an average 7.3 percent for the November-through-April periods. By comparison, total returns during the May-through-October periods were barely positive, at 0.1 percent.

Now some raise a few red flags on this analysis, including the time period and the evolving socioeconomic landscape in the period. While that may or may not be as significant as some put forth, I personally think a broader measure of the stock market, economy and industry, such as the S&P 500 or the Wilshire 3000, would produce far better findings, compared with the 30 stocks that make up the DJIA. Again, this is my opinion. At the same time, Mr. Hirsh’s summary findings are just that - the average of what happened over those months, which of course means there will be instances when May-through-October perform far better than the average as well as below it. As always, we need to dig deeper to get at the heart of the matter.

As I write this, the S&P 500 nears a 2 percent drop for the current May, which includes its worst two-session slide since February. Again some perspective on the month of May…