Should investors Sell in May and go away?

According to an old stock market adage investors should "sell in May and go away, come again on St. Leger Day" (mid September) or in a US variation St. Leger Day is replaced by Labor Day, the first Monday in September.

The thinking behind this oft-repeated proverb is that markets quieten down in the summer as City deal-makers, fund managers and brokers supposedly pack up to enjoy the social 'season'. According to stereotype, old school City gents endure an arduous fourth month stretch involving sipping jugs of Pims No.1 at the Henley Regatta, punting on the horses at Royal Ascot, scoffing strawberries at Wimbledon, quaffing bubbly at Cowes Week and, of course, enjoying leisurely days at cricket test matches. As a consequence, deal-making is subdued and shares go no where, or worse still, they head down.

F&C Investments has once again put the theory to the test by studying the returns on the FTSE 100 over twenty calendar years during the months of May to mid September and comparing these to the performance of the same index over the full calendar years. The results suggest that the "sell in May" theory is far from cut and dry.

"In 14 of the last 20 years the Footsie has delivered positive returns over the summer months. Put bluntly, 70% of the time it would have been wrong to have sold in May," said Jason Hollands (pictured) of F&C Investments.

"The incidence of summer down months is in fact not dissimilar to the picture for whole calendar years," he added, "with just five down years over two decades."

However, the F&C research does note that Summer share price declines, when they do occur, can be quite pronounced – but so too are summer rallies.

"The worst year was 2002 when the FTSE 100 declined by over 21% during the summer months, representing most of the steep decline for the year as a whole. This echoed the pattern of the previous year, 2001, when the index was down by over 19% during the summer. On the flip side of the coin, six of the last twenty summers have seen double-digit rallies from May to mid September.

"Perhaps of more interest were the summers of 1992 (-9.2%), 1998 (-10%) and 1999 (-6.6%) when shares fell although in each case across the whole calendar year returns were positive. However, for those trying to spot patterns, these three years of negative summers are offset by 1990, 1994 and 2000 when markets dipped across the whole year but were positive during the summer," said Hollands.

But what of more recent experience, markets having taken a sharp tumble last year in May?

"Devotees of the adage got very excited last year but by mid September returns on the FTSE 100 were pretty much back up to where they had been at the start of May and that is without taking into account the brokerage costs and potential tax for those who had liquidated their equity investments for the summer months. Were the savvy investors those who sold out before May? Perhaps, but the really clever ones were those who actually got into the market during the summer and made a spectacular return over the coming months," concluded Hollands.