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"Sell in May and go away" is an age-old investment adage, referring to the traditional belief that stocks show weaker performance in the summer, from May to October, and stronger performance in the winter, from November to April. According to the saying, you should sell stocks in spring, just before the summer lull, and buy them in autumn, just before their value rises again. It’s sometimes also called the "Halloween indicator".

There is a good deal of truth to this. Findings from a 2002 paper showed that this pattern held true in 36 of 37 developed and emerging markets studied globally, and was particularly strong in Europe. The paper noted evidence for it in the UK stretching back to 1694.

The effect may be caused by seasonal fluctuations in optimism among investors.

But there are other adages that suggest investing in other times of the year, like the “January effect” – an increase in stock prices during the first month of the year – or December’s “Santa Claus rally”, a similar boost that has been linked to holiday-season optimism (and Christmas bonuses).  

So, what gives? Is one time of year better than the other to invest?

The so-called "Santa Claus rally" is one of many seasonally timed trends in the stock market (Credit: Getty Images)

Seasonal adjustments

Selling in May is not what people actually do.

US and Canadian researchers found that investors are more bullish in spring and cautious in autumn. In the study, the authors looked at how money flows among different categories of mutual funds to find that people are more likely to buy risky assets in warmer months, but are more risk-averse in later in the year, more likely to sell higher-risk assets to buy safer ones.

Some economists argue that fluctuating temperatures, day length and sunlight levels can sway investor behaviour

This springtime bullishness even spills over into the financial media. In a paper published in 2014, two Japanese researchers used a text-mining technique to analyse the mood of newspaper articles between 1986 and 2010. They found increased optimism in the first half of the calendar year, yielding to pessimism in the second half.

The origin of this seasonal mood cycle may lie in the seasons themselves. Some economists argue that fluctuating temperatures, day length and sunlight levels over the course of the year can sway investor behaviour and so move markets.

Lisa Kramer is a professor of finance at the University of Toronto who studies human behaviour and investing. She’s found evidence that there is indeed a seasonal effect on people’s investing habits. She points to seasonal affective disorder – SAD – and how long, cold, dark winters can make people less optimistic about investing.

“People are not often aware that their mood can play into this, but the evidence is pouring in,” she says.

Halloween jack o' lanterns in Zhengzhou, China. Autumn has seen investor behaviour become both more optimistic and pessimistic in the past (Credit: Getty Images)

An earlier 2003 study by the same US and Canadian authors who identified seasonal investing behaviour also linked seasonal preferences for different investment types to SAD.

Comparing stock market index data from countries at various latitudes with their seasonal daylight fluctuations, the researchers found a so-called "SAD effect" in the seasonal cycle of stock returns that was "both significant and substantial". Returns were at their lowest in September, rising throughout autumn and peaking just after the winter solstice (late December) before falling again and flattening out over spring and summer.

The results in the southern hemisphere (Australia, New Zealand and South Africa) were six months out of phase with the northern hemisphere, mirroring the seasons. Crucially, the nearer the countries were to the poles and so the shorter their winter days, the more pronounced the winter SAD effect.

“It helps us understand why markets can be so volatile,” Kramer says. “It helps us take a step back from our [emotion-driven] decisions.”

Still, being cautious is not always a good thing when investing. Stable investments like government bonds typically yield lower returns in the long run than riskier stocks with a higher return potential, and over-caution can actually lead people to take larger risks to avoid a loss.

If many investors become more cautious when it’s dark outside and returns are generally lower for cautious investments, why should overall returns then rise in winter?

Because when the cautious investors sell their riskier assets in autumn, the price drops, meaning quality investments can be scooped up for a low price by those willing it to take the risk. Since these quality investments were bought at a bargain, the returns are disproportionately high when the market eventually bounces back at the end of winter, the authors suggest, boosting overall returns.

But, to be sure… there are several caveats.

A currency exchange shop in Pakistan. Depending on where you are in the world, different months have different effects on investor confidence (Credit: Getty Images)

Off the beaten path

Seasonality exists, but it’s just one piece of the investment puzzle.

First, the ‘sell in May’ effect is only one of many seasonal cycles affecting stock prices. Others include the January effect, the holiday effect and the turn-of-the-month effect. These effects tend to be stronger in small-cap stocks (shares of companies with a market capitalisation under $2 billion).

There is seasonality in the stock market, but there have been mixed arguments or evidence about why - Mark Ma

Second, and more importantly, seasonality is only one of many, many factors affecting the stock market. Returns in a given year may deviate substantially from seasonal patterns. Those looking for investment guidance are better off ignoring the thermometer and calling a qualified financial adviser instead.

“There is seasonality in the stock market, but there have been mixed arguments or evidence about why,” says Mark Ma, a professor of accounting at American University in Washington, DC. He gives credence to the SAD effect, but points to a place like “Singapore, where the weather is the same almost all year – around 32 degrees Celsius – but they still found this effect.

I think [daylight and temperature] play a big role in it, but it’s probably not the only reason there is seasonality.”

He mentions a January effect, and how stock returns in January tend to be higher because the tax year ends in December. So, if people have a lot of profits, they have to pay a high tax bill – but not if they sell their stocks beforehand. Their total taxable income goes down.

Ma thinks that there isn’t a fixed window to just invest and profit, and to not bank on any seasonal patterns happening every year.

After all, there are tons of different factors at play, especially with something as unpredictable as the stock market.

The experts say…

Although it’s good to be mindful of seasonality, you should pay closer attention to concrete evidence, like growth potential for a company and how profitable it’s been over the last year, says Haran Segram, a clinical assistant professor of finance at New York University.

“I’m a firm believer in the fundamentals of a stock – the cash flow, the risk and growth, rather than the particular month to invest,” he says.

People do have an emotional connection with money... I tell my students, it’s a patience game - Haran Segram

All the experts interviewed for this piece say to be mindful of seasonality – but the true best thing to do is take less risk. Although short term you might yield fewer returns, that thinking will pay off in the long haul: like slowly squirrelling money away and letting it compound over years.

Segram agrees that, even in depressing winter months, for example, not to allow your investing decisions to be guided by how you feel.

“People do have an emotional connection with money,” he says. “They see that it has the means to their comfort and glory in the future. But people don’t make rational decisions at a time when it comes to money. I tell my students, it’s a patience game.” Kramer agrees.

“Take a holistic view,” she says. “Make regular frequent contributions to your retirement savings. That’s the best approach to success. When we try to outsmart the market, we often end up harming ourselves.”

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