Wall Street’s ‘sell in May and go away’ adage could be fading away

‘2018 may be different from other midterm election years’

“Sell in May and go away,” arguably the most well-worn axiom on Wall Street, has proven to be shrewd advice during previous midterm election years.

Though the exact origins of the phrase are a bit murky, up until recently, stocks had underperformed in the six-month period starting in May, which coincides with vacation for many traders between the Memorial Day and Labor Day holidays. But this year, investors may be better served by eschewing the adage as stocks look positioned to buck that trend, with corporate profits coming off a banner quarter and as the U.S. economy continues to gain traction.

Growth comparison

According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has lost 64.71 points from May through October since 1950 versus a gain of 20,790.89 for the November through April months.

Over the same time, the S&P has gained 264.31 points in the May-October period, compared with a gain of 2,420.72 points during the other six months.

While stocks have risen in the November through April period, volatility has also increased. After hitting a record high on Jan. 26, the S&P dropped more than 10% to bottom out on Feb. 8 at 2,581 and tested the low again in late March. The index now sits about 5.5% below the January high.

“I don’t think it is going to work this year,” said David Joy, chief market strategist at Ameriprise Financial in Boston. “The economy is strong, earnings are good, the market has already sold off a little bit.” This year, May is off to a strong start, with both the Dow and S&P on track for their best performance in the month since 2009. Midterm years have proven to be particularly troublesome, however, according to data from LPL Research. Elections for the U.S. House of Representatives and Senate are set to take place in November.

Historically, the party in power loses seats after a new president’s election and the Republican party currently holds a majority in both the Senate and House of Representatives.

“Midterm elections are a headwind and a concern but there are others as well,” said Terry Sandven, senior equity strategist at U.S. Bank Wealth Management in Minneapolis. “The difficulty of investing is on the rise, that is largely a factor of inflationary pressures becoming more prevalent and interest rates on the cusp of a regime change.”

As for selling in May, the last time the month was negative for both the Dow and the S&P was 2012. In the five years since, the S&P has climbed in the May through October period four times, with the only decline being a 0.3% dip in 2015.