Some investors follow a common strategy that is based on seasonal changes in market sentiment. The strategy, called “sell in May and go away”, entails switching to risk-free assets in the six months that start in May and end with the end of October. After that, investors can switch back to more aggressive assets such as stocks. For many years, the performance of this strategy has beaten that of US benchmarks such as the Dow Jones. However, it may not be a good idea to follow this strategy this summer.
The rationale behind the strategy
This strategy works for a variety of reasons. First of all, investors become less active in the summer as they seek to have some leisure time. This dampens activity in the stock market. Second, financial institutions usually implement different strategies by the end of the year, which can be positive for equities. Third, in the first months of the year, there is usually optimism which drives investors to buy stocks. This was evident in the first fourth months of this year.
Why it may not be a good choice this year
Despite this, this year may not be the best year to follow this strategy for many reasons. First, this is the year before the year of reelection. The president can take action to boost the market to improve his chances. Second, the growth rates came better than expected in the first quarter, despite the pessimistic forecasts. Third, the earnings of many companies came positive earlier. All of these factors can mean the market is still bullish.
While the strategy may have been good in many years, this year it may not pay off. Furthermore, no strategy in the market is written in stone, and investing without looking at the context can be a risky action.