As we approach the summer months, many investors are revisiting the old Wall Street adage: “Sell in May and Go Away.” This theory suggests that the stock market tends to underperform from May to October, leading some to suggest that investors should exit the market at the beginning of May and reenter at the end of October. With the presidential election looming, investors are modifying this old strategy and have a new saying, “Sell in May and Go Away Until After the Election”
Whether the original “Sell in May” strategy holds any predictive power is a subject for a different discussion. However, it’s important to focus on a particularly interesting and often misunderstood aspect regarding the stock market: its performance during presidential election years.
Election Year Market Performance
Presidential election years introduce a unique element of uncertainty and volatility to the stock market. The impending election can create anxiety among investors, who may fear potential policy changes or economic instability. This anxiety often fuels discussions around strategies like “Sell in May” as investors seek ways to mitigate perceived risks.
To understand how the market behaves during these years, let’s look at historical data. Below is a chart highlighting the average return of the S&P 500 during election years since 1950:
As depicted, the market tends to drift without clear direction through the first half of election years, typically bottoming in late spring. Interestingly, despite the uncertainties surrounding elections, the market generally begins a move higher from this point onward. This pattern suggests that the initial anxiety does not necessarily translate into long-term underperformance.
Election Years Tend to be Positive
Looking back at the last 18 presidential elections since 1950, we also find a reassuring trend: the stock market ended the year positive in all but three instances. This historical data challenges the notion that election-related anxiety should lead investors to exit the market. In fact, it often pays to stay invested, as the market tends to rebound and perform well by the end of the year.
Staying Invested Makes Sense
It’s easy to let fear and uncertainty derail your investment strategy. The constant news cycle and political debates can exacerbate concerns, leading to hasty decisions. However, by using empirical data, investors can gain valuable context and confidence.
Stay informed, stay invested, and let history help guide your investment strategy.