Stocks ended the month on a sour note yesterday as investors could not find any comfort, anywhere from the looming Fed decision expected today. Consumer confidence dips into 2022 range as respondents are unsure about the future.
Trick or treat. Hang on, let me blow the dust off this page in my Wall Street book of sayings. The last time I browsed this page was… well, exactly a year ago. It reads “Sell in May and go Away!” Many of you have probably heard this old adage before. If you have, if you looked at the calendar, and if you watched the markets yesterday, you were probably wondering how valid this proverb is.
Let me quench your thirst for knowledge on this matter. In their article “The Halloween Indicator, ‘Sell in May and Go Away’: Another Puzzle,” researchers Sven Bouman and Ben Jacobsen delve into this well-known by some market saying that suggests stock returns are lower between May and October compared to the rest of the year. In the research, the authors test the anomaly across 37 countries to determine its validity and persistence. Interestingly, they find that the pattern holds true in nearly all the countries studied, with particularly strong effects in European markets. The study spans several decades, reinforcing the robustness of the seasonal effect in stock markets globally. Hmm, so maybe it’s not just an old saying overheard being uttered by a dejected stockbroker mumbling into his 5th beer at one of Wall Street’s famous drinking holes.
No mumbling drunks, Bouman and Jacobsen use sophisticated statistical methods to analyze monthly stock returns, comparing the May-October period against the November-April period. Sophisticated, as in they use OLS regression with a dummy variable for seasonal effect. They use this equation: rt = μ + α1St + εt. My academic friends will recognize this as a variation of the standard single-variable regression using a dummy variable (S) to represent in or out of season 🤓. Their findings suggest that, historically, investors could potentially benefit from selling stocks in May and buying them back in November. This strategy, according to their analysis, tends to outperform the standard buy-and-hold strategy, where an investor simply buys stocks and holds onto them throughout the year. This result holds even after accounting for potential risks and transaction costs, which suggests that the strategy might be practically useful, not just a statistical anomaly. The authors attempt to find the cause of the anomaly such as trading volume, interest rates, and even vacationing habits, but none stands out. At the end of the day, it appears that the cause may be simply, human behavior.
“Um, obviously,” you are thinking, “isn’t that what the market is all about?” Well, no, there is actually a fundamental element to the market. But, in situations where a certain anomaly can be observed and not attributed to any fundamental factor such as news, the all-famous Efficient Market Hypothesis is challenged. This Halloween Indicator (one of its other aliases) is just one amongst 400+ proven anomalies. Some other famous ones include The January Effect, The Size Effect, The Momentum Effect, and the Weekend Effect. I won’t explain them now, but they do exist… and will most likely star in future market notes… so stick with me.
If you are so inclined, this is the citation for the Bouman paper: Bouman, S., & Jacobsen, B. (2002). The Halloween indicator, “sell in May and go away”: Another puzzle. American Economic Review, 92(5), 1618-1635. It is an interesting paper and not difficult to read. Wait, before you sell all your stocks and go on a world tour chasing Taylor Swift concerts with hopes of returning on Halloween, gorging yourself on your grandkids’ candy, and buy back your stocks, I want to remind you that these authors’ results were from global markets, not only the US, where you most likely hang out most. I will also remind you that this study was published in 2002 in a very different market regime, and just because the effect was observed, it doesn’t mean it always happens. It existed simply, on average, meaning it worked more than it didn’t, and there is no way of predicting whether this year will be one in which it does. Therefore, I would take it all with a grain of salt and maybe, pay attention to what Jerome Powell say this afternoon in his press conference. Happy May 1st!
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