Sell in May and go away !

Thierry Crovetto (pictured) and Pierre-Yves Dittlot are independent fund analysts at TC Stratégie Financière.

The phenomenon of the seasonal nature of markets is often illustrated by this well-known saying.

In their studies, researchers are however not only able to identify calendar effects, which are almost as many as there are divisions of time but they have also shown non calendar seasonal phenomena, ranging from political cycles to the cycles of the moon…

Historically, we can observe that the period from November to April is on average more performing than that of May to October.

Since 1986, we find that the performance of the Eurostoxx 50 index dividends reinvested was on average from November 1st to April 30th 7,6%, and -0.7% between 1 May and 31 October!

We can observe the same seasonality for the outperformance of Small Caps versus Large Caps: during winter months MSCI Europe Small Caps outperformed by 7.6% the Stoxx 50 Index since 2002, but slightly underperformed -0.3% during the months of summer.

These results are quite similar in other international markets.

Shorter intervals were also observed, notably the three days preceding the end of the month and three days following the beginning of the month where securities offer the best performance.

In addition, the monday effect which shows that on average performance on Mondays are lower than the other days of the week.

To explain these phenomena, we can include fiscal reasons (production of unrealised losses at year-end) or “window dressing” (sales done at the end of the year by the portfolio managers of the worst performers of the year).

We can also estimate that risk appetite is highest at the beginning of the year and declines thereafter; this can be paralleled with the principle of progress, and the desire to take profits after a strong performance, resulting in a correction, which may encourage to take risk again…

Unconnected, if not human nature, the seasonality of mortality (more deaths in winter, fewer deaths in summer) is a long established public health mystery.

We see in fact that the mortality rate between November and April is higher than that of the rest of the year, peaking on 1 January! (Analysis done by David Phillips, professor of sociology of 57 million certificates of deaths between 1979 and 2004)

In the upcoming issue we will address more generally economic cycles and markets, notably through technical analysis.

According to Mark Twain, “History does not repeat itself, but it does rhyme.”

This is why investors should take into account these seasonal elements to optimize the management of their portfolio.

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