Michael Fuerst, University of Miami associate professor, along with professors Sandro Andrade and Vidhi Chhaochharia divulged in a 2012 paper that on average, stock returns are about 10 percent higher in November-April half-year periods than in May-October half-year periods. They also observed that the Sell in May effect is pervasive in financial markets.
They basically performed an out-of-sample test of the Sell in May effect studied by Bouman and Jacobsen (American Economic Review, 2002). The main assumption in their paper is to reduce equity exposure starting in May and levering it up starting in November. They proved that statistically speaking it could be considered as a profitable market timing strategy. They tested return across 37 market within a 14-year time period. We all know that we need at least 60 observations to declare that our statistical results are robust enough and in fact, by pooling the data, the authors were able to show statistical significance. What about their result? The average Nov-Apr return for 37 markets was 10.69% vs. only 0.95% experienced during May-Oct for the period between 1998 and 2012.
Of course the phenomena above can be rubricated as a pure statistical fluke. Indeed, it worked last year but some skeptical investors define this strategy ridiculous, characterized by the same predictive power of some forecasters that tie stock-market behavior to astrological views.
I would like to focus the attention on some details that can make the difference. Generally speaking, the investor that reduces the amount of money invested in equity is going to park the liquidity generated in Treasury or in cash instruments. After saying that, we would remind us that in the current environment characterized by low yields, if not negative for a European or a Japanese investor, our approach is becoming more resilient, surely we are getting more risk lover. In fact we are attracted by risky assets (equity and high yield) returns and we are more and more attracted by longer maturities.
Here we are. I think that “selling in May and go away” could turn in a good advice. Not only a crazy and stupid motto. I would recommend the investor to be aware about nominal yields. Indeed reassessing the risk is always a good advice. So that “selling BONDS in May and go away” sounds like something to seriously take in consideration. For instance, on Friday 29th of April the market was trading in a risk-off mood but the Treasury did not react as a risk haven. A weaker dollar, stronger commodity prices and a combined fear of higher inflation and a possible FED hike, all together were affecting the Treasury price action. Hence, if you are deciding to reduce your equity exposure, please do not forget to cut your government bond exposure as well. No matter if Kuroda or Draghi is behind your yields, the latter are very lows to protect you against a minimum level of inflation.