Sell in May & go away, a right thing to do?

The frontline Indian equity indices were up by almost 20 per cent in the month of April 2020, after losing more than one-third of its value in the previous two months. The roller-coaster ride of the equity market continued in the month of May and the equity indices are again down by four per cent, month-till-date.

‘Sell in May and go away’ forms relevance because historically, there has been underperformance in stocks observed in the month of May till October. This is a worldwide phenomenon. According to a report, since the inceptions, S&P 500 and Dow Jones Industrial Average have each gained an average of about five per cent during the November-to-April period and only two per cent from May to October.  

Sometimes, there were some economic reasons for such an underperformance. For example, Greece was on the verge of defaulting on its debt in May 2010 and China slashed its GDP growth estimates in mid-2015. Even in the current scenario, we see Coronavirus recession risk and renewed US-China trade war tension causing nervousness among investors.

Indian experience

Even in the Indian equity market, we have witnessed a large-scale downfall in the month of May. For example, in the year 2004, 2006, 2010, 2011 and 2012, we saw a major fall in the value of Sensex. However, digging deeper, their returns in the month of May is no different from other months. Our study since 1991 shows that the average monthly return for the month of May is 0.23 per cent while the median return is 1.3 per cent. Based on our study, in 29 years, it was only 13 times when Sensex had generated a negative return in the month of May, while in 16 times, it generated a positive return.

The current month (May) may witness negative returns; however, it will purely be due to economic reasons rather than the impact of any month. Therefore, if you are a long-term investor, do not sell in the month of May and go away!