Many investors are familiar with the old adage “Sell in May and go away.” The other parts of that story is the going away part usually ends in October while the time to return to stocks is usually November.
Investors that doubt the potency of the best and worst six-month periods in which to own stocks should consider the following data courtesy of S&P Capital IQ: Since 1945, the S&P 500 rose an average of 7% from October 31 through April 30. The average April 30 through October 31 gain was a mere 1.3%.
Investors should also note seasonal trends are not confined to U.S. equities. “This seasonal performance phenomenon has also been evident in the MSCI-EAFE and MSCI-Emerging Markets Indices since 1970 and 1988, respectively,” said S&P Capital IQ Chief Equity Strategist in a note.
Ideas for the globally-minded investor that wants to reap the benefits of seasonal trends include the low-cost iShares core ETFs include the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) and the iShares Core MSCI EAFE ETF (NYSEArca: IEFA), which have annual expense ratios of 0.18% and 0.14%, respectively.[More Upside Seen for Shares of BlackRock]
Noting the “market’s performance in the November through April period beat its performance in the subsequent May through October period more than 70% of the time,” Stovall points out some winning sector ideas.
Rather than just lumping capital that was in bonds or on the sidelines in the May-October time period back into a broader market stock ETF, investors should take a more tactical approach that includes exposure to sector ETFs.
Specifically, consumer discretionary, industrial and materials ETFs. Think the Consumer Discretionary Select Sector SDPR (NYSEArca: XLY), the Vanguard Industrials ETF (NYSEArca: VIS) and the Materials Select Sector SPDR (NYSEArca: XLB).
“Rotating into the Consumer Discretionary, Industrials and Materials sectors from November through April, rather than back into the market, beat the S&P 500 by 640 basis points per year, and resulted in an even lower standard deviation of 13.7,” said Stovall. [Comparison of Major Sector ETFs]
And for those that want to be prepared for sell in May and go away next year, a couple of highly popular ETFs will help: The Consumer Staples Select SPDR (NYSEArca: XLP) and the Health Care Select Sector SPDR (NYSEArca: XLV).
“History shows that from May through October since 1990, the S&P 500 Consumer Staples and Health Care sectors rose by 4.6% and 4.7%, respectively, versus 1.4% for the S&P 500, beating the market during this six-month stretch at least 65% of the time,” according to Stovall.
Check out the chart below to see just how rewarding the semi-annual sector rotation strategy has been.
Chart courtesy: Sam Stovall, S&P Capital IQ