It's one of Wall Street's favorite aphorisms: "sell in May and go away." But is there any reason behind the rhyme?
The full "sell in May" rule is that investors should get out of stocks and into riskless Treasury bills before May Day, and get back into equities after Halloween. And unlike many Wall Street myths, the idea does have some strong grounding in the data.
Dividing the year in half, one does notice a divergence in S&P 500 performance between the November to April period ("the good half") and May to October ("the bad half"). Going back to May 1978, the S&P has risen an average of 1.3 percent each month in the "good half," but only 0.3 percent in the average "bad half" month. Even if one removes the heinous October 1987 from that May to October average, the S&P is still only looking at an average gain of 0.4 percent in that bad half.
For Mark Dow, an investor who writes at the Behavioral Macro blog, there is actually a good explanation for this.
"It's not true for any fundamental reason, but it really maps to our psychology and how risk budgets are set," Dow told CNBC.com. "At the beginning of the year, people tend to be more bullish just because you're putting money to work. Asset allocators are giving money to managers, and speculative juices naturally flow. And if the macro backdrop is decent, we continue to ramp it up. But at some point we take it too far, and all that enthusiasm unwinds and reverses. And that often happens to take place between May and July."
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