Bank of America cautions against age-old Wall Street adage of ‘Sell in May and go away’ ahead of predicted summer rally

April 19, 2023, 11:00 AM UTC
A person on the phone in the New York Stock Exchange
Bank of America has warned investors not to go with market myths this May, otherwise they’ll miss out.
Spencer Platt—Getty Images

Investors who stick to the trend of selling up at the end of next month could miss out on a summer rally, a Bank of America analyst has warned.

Technical strategist Stephen Suttmeier has poured cold water on the myth that investors should sell up at the end of May, saying the strategy “leaves much to be desired.”

The Wall Street maxim “Sell in May and go away” is derived from the apparent underperformance of stock from May to October, with Suttmeier highlighting: “Seasonality back to 1928 shows that May through October has the lowest average and median returns of any six-month period of the year with the S&P 500 up 65% of the time on an average return of 2.16% (3.11% median).”

However, he pointed out that neither the average nor the median returns for the six-month window are negative, and that although “May can be a weak month for the SPX…if you ‘sell in May and go away’ you could miss a summer rally.”

BofA’s data highlighted that April is a strong month, up 65% of the time with an average return of 1.30%. May is weaker, showing the third lowest average return at –0.04% but is up 59% of the time.

June and August average returns of 0.69% and 0.67%, respectively, before the worst month of the year—September—which is up only 44% of the time.

As such Suttmeier concludes: “Monthly seasonality suggests selling in the strong month of April, buying weakness in the risk-off month of May ahead of a summer rally, and selling in July to August prior to September, which is the weakest month of the year. 

“Instead of ‘Sell in May and go away,’ it should be ‘Buy in May and sell July/August.’”

Suttmeier also identified that the six-month slump is back-end loaded from August to October.

BofA data reveals that the second-strongest three-month period on the S&P 500 is is June to August, up 3.15% on average. The weakest three-month window of the calendar is August to October, which is down 0.05% on average.

As such Suttmeier reiterates: “Three-month seasonality also suggests a sell in July/August rather than a sell in May pattern. This means that the SPX tends to get a summer rally and weakness in May–October is back-end loaded.”

The election effect

Another Wall Street theory is a stock cycle correlating to the presidential elections, developed by Stock Trader’s Almanac founder Yale Hirsch.

The hypothesis goes that a predictable pattern occurs every time a new president is elected: Stocks perform weakest in the first year, then recover and peak in the third year, before falling in the fourth and final year of the presidential term.

Research from U.S. Bank supports this theory to some extent, with analysts finding that in the fourth year of the cycle both stock and bond markets showed more “muted” performance.

Suttmeier highlights that the strongest quarter in the third year of the presidential cycle is the first three months, followed by the second and then the third.

He adds: “This suggests that year three also has a tendency for a summer rally ahead of a fall dip. June–August is up 70% of the time on an average return of 3.26%.

“This occurs ahead of a fall dip with August–October and September–November the two weakest three-month periods of year three with average returns of –0.50% and –0.73%, respectively.”

Optimistic outlook

The rosy take on summer stock is in keeping with Bank of America’s balanced stance on the economy.

In March the bank’s CEO Brian Moynihan said that although interest rates won’t drop until 2024 he suspects most people won’t even notice a recession, with the boss describing the contraction as a “technical” recession as opposed to a “deep drop.”

Just yesterday the banking boss—who has earned praise from Bank of America investor Warren Buffett—said he expects to see a “relatively mild” recession as opposed to the car crash other economists have been predicting.

Moynihan said on the bank’s quarterly earnings call on Tuesday: “The fact that unemployment is still 3.5% [indicates] full employment-plus. And then the wage growth is slowing and tipping over.

“So the signs of inflation are tipping down, and it’s still there, but that translates into relatively good activity. So we see a slight recession, and we’ll see what happens.”

In his note published the same day, Suttmeier notes a range of bullish indicators, from a positive January outlook to a golden cross in February—a bullish breakout pattern which gets its name from the chart figure that occurs when a short-term moving average crosses above a long-term one.

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