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?
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:
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.