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300 years of sell in May

300 years of sell in May

Regular readers know I'm a fan of selling in May. What you might not appreciate, however, is just how much evidence we have for this rule.

Thanks to the Bank of England, we have share price data going back to the early 18th century. These numbers tell us that even over a period as long as 300 years we still see seasonality in prices. Since 1710, prices have fallen on average in July, September and October and have barely risen at all in June. Over these 307 years prices have risen by an average of 2.8 per cent from Halloween to May Day, but by only 0.4 per cent from May Day to Halloween (these numbers exclude dividends).

 

Average monthly change in UK share prices since 1710

 

Yes, May itself has seen decent average returns, which suggests that selling sometime in May has worked better than selling on May Day itself. But this is consistent with the general theory that appetite for risk increases in the springtime and falls in the autumn.

'Sell in May' wouldn't just have got us out of shares before the financial crisis of 2008. It would also have protected investors from the worst of the bursting of the South Sea Bubble in 1720 (which occurred in September and October) and from the collapse of Overend Gurney in May 1866. The rule would also have significantly cut losses on collapsing railway stocks in 1847 and 1848.

If we split the past 307 years into 50-year periods, we see that the 'sell on May Day, buy on Halloween' rule has worked quite consistently. Only in 1911-60 were price rises greater in the summer than winter. What's unusual about recent years has been the strength of the market in the winter, rather than weakness in the summer.

All this perhaps directs us to a less reputable reason for some resistance to the idea of selling in May. Fund managers and financial advisers want to believe that they are more rational and better informed than 18th century dandies or Victorians in stovepipe hats and so are less swayed by sentiment. The numbers, however, tell us otherwise. Knowledge and technology progresses, but rationality is slower to do so; we are still emotional creatures.

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By Chris Dillow,
03 May 2017

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Chris Dillow

Chris spent eight years as an economist with one of Japan's largest banks. Here, he provides insightful commentary on the latest economic news and data, along with thought-provoking articles about investor behaviour.

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