Some say it’s the fear of stagflation.
Some say it’s chaos on Capitol Hill.
Some say it’s turmoil in the Middle East.
But we all know the real reason the stock market is so crummy, right?
It’s October! Of course stocks are down!
It is a bizarre, inexplicable, and yet undeniable, fact that, throughout history, Wall Street has produced almost all of its gains during the winter months of the year — from Nov. 1 to April 30. It is an even more bizarre, inexplicable and yet undeniable fact that the rest of the world’s stock markets have done the same thing.
The so-called summer months, meaning the half of the year from May 1 to Halloween, have generally given you bupkis or worse.
Around the world, over the course of centuries of recorded financial history, stock-market returns have averaged four full percentage points higher from November to April than from May to October, report researchers Ben Jacobsen at Tilburg University and Cherry Yi Zhang at Nottingham University’s Business School in China. This so-called Halloween Effect seems “remarkably robust,” they concluded, after studying the financial returns of 114 different countries going back as far as they could find reliable monthly data — starting with the stock market in 1693 London.
Even more extreme: In the 65 countries for which they had extensive data both about the stock market and about short-term interest rates, it’s fair to say you would have been better off selling your stocks on May 1, putting the money in the bank, then taking it out again at the end of October and buying back your stocks (ignoring fees and taxes, of course).
“In none of the 65 countries for which we have total returns and short-term interest rates available — with the exception of Mauritius — can we reject a Sell in May effect based on our new test. Only for Mauritius do we find evidence of significantly positive excess returns during summer.”
Italics mine. Mauritius?
The Dow Jones Industrial Average
DJIA
is now lower than it was at the end of April. So is the Russell 2000
RUT
index of small-cap U.S. stocks. The benchmark international stock index, the MSCI EAFE, is down about 6%. Japan’s Nikkei
NIY00,
is slightly up, as the yen has tanked.
The S&P 500
SPX
is hanging on to a small gain, but that is only because of the early summer gains of a few tech titans. The average S&P stock is down about 2.5% since the end of April — while an investment in no-risk Treasury bills is up more than 2%.
Meanwhile, let the record show that, over the same period, according to the record keepers at MSCI, the stock market in Mauritius is up 12%.
Booyah!
Every time I write about this Halloween or “sell in May” effect, I make the same two points, and I make no apologies for repeating them here, because they are unavoidable.
The first is that, every spring, after looking at this data, I am tempted to sell all my stocks at the end of April, and every year I don’t, because I think it’s absolutely ridiculous. (And someone on Wall Street who is much smarter than me usually persuades me not to.) And most years I end up kicking myself for not doing it.
The second is to recall the old economists’ joke: “I don’t care if it works in practice! Does it work in theory?” Selling in May — or, sure, the Halloween Effect — has absolutely no reason that anyone can find for working in theory. But apparently, it works in practice — which is pretty much where we are now.
Does this mean stocks are going to rally? It’s anyone’s guess. It would be crazy if it were that simple. But, then, the whole Halloween Effect is crazy.
If history is any guide, now is the time to buy stocks, not sell them, because the next six months are likely to be the time when they make you money. And if history isn’t any guide, well, aren’t we all sunk anyway?
