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Sell in May and Go Away?

While investors should never let rules of thumb override financial fundamentals, there are times when the fundamentals can become quite hazy. In fact, recent inflation figures and other high-frequency indicators suggest that we are in such a period right now.

LONDON – During my lengthy career in finance, I picked up several market heuristics that have generally proven more useful than not. Every January, for example, I remember the “five-day rule,” which holds that if the S&P 500’s accumulated performance is positive over the first five days of the new year, there is around an 80% probability that the overall market will end the year higher than where it started. So far, this analytical trick has worked pretty well, despite all of the world’s uncertainties.

With springtime comes a second rule of thumb: “Sell in May and go away” (and, for us Brits, “come back on St. Leger Day” – September 15). Though less statistically precise, this one has also often proven useful. If you are an investor – especially one who has had a good first four months of 2023 – you might want to bank your gains and sit on the sidelines until the fall, because there is a decent chance that markets will have declined in the intervening months.

Of course, there is no objective reason why either of these rules holds true. After all, equity markets historically tend to rally more than they fall, and they also generally outperform other financial markets – not to mention cash or fixed income – over time. Obviously, one should never let a rule of thumb override the fundamentals. Yet there are times when the fundamentals can become quite hazy, and there is good reason to think that we are in such a period right now.

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