"Sell in May and go away…." 5000 years of evidence
Every year journalists and practitioners write about an old stock market wisdom "Sell in May and go away”. According to this old wisdom (first found in writing in 1935 and at the time already described as an old adage) you should avoid the stock market during summer (May through September/October). Professor Ben Jacobsen jointly with Sven Bouman were the first to extensively test this market wisdom in 37 countries. They found it held true in 36 countries in their sample and their seminal work was published in the international top journal the American Economic Review in 2002.
It seems strange that trading on such a simple market wisdom might generate a superior performance and many academics and practitioners to this day have a hard time believing that it would work. The old adage would not only defy market efficiency (the notion that stock returns are unpredictable) but also question the fundamental relationship between risk and return. Moreover in theory the anomaly should disappear once it became known.
To answer the sceptics Professor Ben Jacobsen jointly with Cherry Zhang tested the strategy using all historical data on stock market indices available for all 109 stock markets world wide. Based on almost 5000 years of combined data (for the UK even going back to 1694) they again found strong evidence of the effect in 82 of all 109 stock markets. They (and many other practitioners and academics) also found the effect was still going strong persisting after the time period used in the original study.
While vacations may be important and the effect is particularly strong in Europe we do not know what causes the effect. A puzzle defying stock market logic and so counterintuitive that sometimes even 5000 years of evidence is not enough to convince the sceptics. In the press the tendency is to argue that the effect may have been there in the past but the coming summer will be different. Of course, they may be right as even 5000 years of past returns does not guarantee future performance. A recent article in the Wall Street Journal provides an interesting illustration.
About the author:
Ben Jacobsen is Professor in Finance at TIAS. His research focuses on forecasting financial markets and behavioural finance. Ben has worked as a consultant for a large number of financial institutions and the media.
- Driebusch, Corrie and Kuriloff, Aaron, The Wall Street Journal: 'Sell Stocks in May? Tempting but Not Very Smart' (May 1, 2016)
- Jacobsen, Ben and Bouman, Sven, The Halloween Indicator, 'Sell in May and Go Away': Another Puzzle (July 1, 2001).
- Jacobsen, Ben and Zhang, Cherry Yi, The Halloween indicator, 'Sell in May and go Away': An Even Bigger Puzzle (October 1, 2014).