When looking at historical trends of monthly stock returns, it’s clear that some months outperform others. Could this data be used to make decisions on what to do in the coming weeks and months?
Earlier this year, I posted an analysis on stock returns by month, which showed the average monthly stock return by month over two different time periods: the last 10 years, and the last 40 years. In each, it was clear that returns start to decline beginning in May, and I indicated that maybe it’s good to sell in May and take a vacation in the summer.
Actually, I now realize that there’s a saying called “Sell in May and Stay Away”, which fits that assessment quite well. Additionally, it seems as though the stock market takes a vacation from solid returns in the summer months. While year to year performance may vary, the averages over the 40-year time frame shown below indicate a trough in returns during the warm weather months.
Should this be taken into consideration at this point of this particular year?
Well….why not?
The historical data clearly shows differences by month. A 40 year time frame isn’t a foolproof sample size, but it’s far from insignificant. There does seem to be some type of seasonality when it comes to stock performance. There’s often a June Swoon for stocks, kicking off a summer vacation.
Now, I’m not specifically recommending that you sell right now instead of during the summer, nor am I specifically recommending that you buy when prices are flat or depressed in these months. I’m not professional at this.
Additionally, every year is different, and there’s no guarantee that there will be a June Swoon or summer vacation for stocks. Stock performance is variable on a yearly basis, and one must of course take into strong consideration the current economic cycle when making such assessments.
That said, consider the monthly stock performance so far this year in 2011:
January: 2.8%
February: -0.1%
March: 2.0%
April: 2.2%
May (to date, 5/16) -2.3%
Now, compare this 2011 performance to the 40-year chart above.
It sure seems like the general pattern is holding so far this year. Strong January, weak February, strong March, strong April, weaker May.
Again, we aren’t making a prediction here. Just saying that it’s worth considering this when making your buying and selling decisions now and over the summer months.
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We had one of the best returns last September! Good to be aware, but timing is a tricky game!
MoneyCone recently posted..What Do YOU And Prince Al-Waleed bin Talal of Saudi Arabia Have In Common
There is nothing wrong with taking a little money off the table if you have had a decent run and are entering a seasonably weak period. I have been selling ONXX into strength a little bit at a time keeping in mind the potential for broader market weakness. I haven’t done it but wonder what the advance/decline line for the market looks like.
optionsdude recently posted..Follow Up on the Million Dollar Silver Bet
I’m assuming that this is the overall market and not any one particular stock. So, if you hold only a handful of stocks, it’s probably best to do a similar comparison with that company. I know that we recently consolidated our stocks into one primary company for now and intend to hold it for a while, summer slump or no summer slump. We’re small potatoes, so it makes sense for us to keep shares only in one or two companies and diversify in other ways (like mutual funds.) Interesting stats, though.
Little House recently posted..Mid-Year Budgeting Update
I maintain my asset allocation and dollar cost average into the market. As I get closer to actual retirement, I will start to shift my portfolio into a less aggressive position.
krantcents recently posted..Would 12-000 Convince You to Move Closer to Work
Let’s hope there are some bargains to be picked up this summer. The market sure seems to be moving sideways lately.
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Volume is usually really light during the summer as well. Market moves sideways and slowly trickles down. Rather unexciting for shorter term investors
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[...] Squirrelers: Are Stocks Ready to Take a Summer Vacation? [...]
Wise Squirrel,
I think you are little late with the warning. The market has already dropped.
The seaonality of the markets are more predicatble than most people realize. I always try to accumuate stocks and shares of my mutual funds during the summer doldrums. Then, they shoot up at the end of the year, because of the January effect.
Bret – the markets appear to be heading into some kind of warm weather “malaise” of sorts. We’ll see where this takes us, but it’s looking flat for now.
I think the reason stocks go down most years in may is because most of the traders and hedge funds go on summer vacation. You can get some good prices on dividend paying stocks while you wait for the stocks to come back up in price.
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The old saying works on certain stocks. Not sure if they ar high beta stocks or just ones that hedge funds and mutual funds move in and out to follow seasonal trends like airelines and shopping.
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