- As long as I've been studying markets (dating back to the crash of 1987), I've heard the old saying applied to equity markets, “Sell in May and walk away”.
- A look at seasonal patterns, though, show the month of May does not normally see a large selloff in the S&P 500 and Dow Jones Industrial Average.
- On the other hand, those looking to sell may want to look ahead at the August through September timeframe.
Every year as April comes to an end we hear to phrases repeated. The first comes from the boy band NSYNC back in 2000, “It’s Gonna Be Me (the last word always sounding like May)”, and the ancient market saying telling us to “sell (equities) in May and walk away”. The first has led to countless recreations of the dancing in the song’s video, though not by me (May). The second reeks of seasonality, naturally piquing my analytical curiosity. I’ve put together a number of studies looking at US indexes over the years, and still haven’t found one that shows conclusive evidence to back up the phrase.
Before we get into markets, though, let’s take a minute to discuss seasonality. What is it? In my book it is a way of studying market cycles over the span of 12 months, usually a calendar year or marketing year. When it comes to livestock markets, it’s a shorter time frame covering the bulk of the life of a particular contract (e.g. June live cattle). Why? In commodities, seasonality shows us normal price changes tied to the ebb and flow of supply and demand (e.g. planting season highs, harvest lows, etc.). In financial markets, it’s a bit different as cycles reflect when money flows change in the markets. Seasonality is also part of Newsom’s Market Rule #3 (Use filters to manage risk), along with price distribution and volatility.
At this point, let me throw at you the idea that a market following its seasonal pattern is relatively boring. On the other hand, when a market starts to move contra-seasonally is when things get interesting. It forces us to look for what has changed fundamentally to make the market move against its normal cycle. An example these days is December corn (ZCZ23), a contract that tends to rally 15% from the first week of December through the first week of June (5-year index) of 8% from the last week of December through the first week of June (10-year index). The Dec23 contract (green line), though, has dropped 14% from the first week of December. But that’s a subject for another day.
With that out of the way, let’s now look at some US stock indexes starting with the S&P 500 ($SPX). I’ve talked numerous times about how the long-term trend of the S&P 500 turned up this past October but doesn’t mean the index will go straight up as 2023 unfolds. As we can see on my seasonal study, there are times of the year when the S&P 500 moves lower, but is the month of May one of them? To find out, I bookended the month with vertical lines and in general, I don’t see what everyone gets so excited about. Here’s a breakdown of different time studies:
- 5-year index (red line): A 1% increase from the last weekly close of April through the last weekly close of May, with the largest dip a 1% drop late in the month.
- 10-year index (blue line): Similar to the 5-year, the 10-year timeframe shows 1% increase over the course of May with only a small blip late.
- 20-year index (purple line): Generally flat the entire month of May.
- 30-year index (gray line): Also flat across the month of May.
Now, if we let our eyes wander a bit to the right we see there is a more meaningful seasonal break that occurs between the second weekly close of August through the last weekly close of September.
- 5-year index: A 5% drop
- 10-year index: A 3% decrease
- 20-year index: A 2% dip
- 30-year index: Down 1%
The problem is the powers that be can’t come up with a clever saying that fits with September.
We see something similar with the Dow Jones Industrial Average ($DOWI), though I did change the comparison timeframes up a bit. The month of May tends to see:
- 5-year index (red line): A 1% increase
- 10-year index (blue line): A 2% increase
- 15-year index (purple line): A 1% increase
- 25-year index (gold line): Also a 1% increase
What’s so scary about that? On the other hand, if we look at the two month period from the first weekly close of August through the last weekly close of September we get a slightly different picture:
- 5-year index: Down 3%
- 10-year index: Also down 3%
- 15-year index: A 2% drop
- 25-year index: Also a 2% drop
All that being said, can US stock indexes fall during May? Absolutely. This year we’ve already seen the S&P 500 and Dow Jones Industrial Average drop 1.2%. In just two days, meaning there is a lot of month left for bigger changes to be seen. Again, things get more interesting when markets do not follow their normal seasonal patterns.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
