Sell in May and Go Away? Depends on Brexit

By Trey Thoelcke Updated Jan 13, 10:10AM EST · Published Apr 28, 10:15AM EDT

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Sell in May and Go Away? Depends on Brexit — © Thinkstock

With May around the corner, should investors sell in May and go away this year? The phrase did not arise in a vacuum, nor is it coincidence or a self-fulfilling prophecy. Though a psychosomatic market may exacerbate the sell-off effect during these coming unpopular months from May through October, there is a fundamental reason for the seasonal decline in equities, the first evidence of which we will see next week. That is, a sharp drop in money supply almost always occurs in the last week of April and can persist anywhere from August to November, depending on the year. The effect is usually a slowing or falling equities market, or a crash at worst, depending on how long the drop lasts.

Since 2008, May to October has underperformed November to April in six out of eight years. Of those six times, four had seen actual declines in the May to October period. Only once since 2008 has the favored November to April period seen declines, while disfavored May to October has seen gains, and that was in 2009 when stocks were rebalancing after an historic crash. Pattern being, unless the market is in the midst of a major rebalancing, November to April will almost always outperform May to October.

But will this year be one of those four since 2008 in which we see real declines come May, or will it be only a mild underperformance as usual? Underperformance is not a problem for long-term holders, as long as there are still gains, so is this May really one to sell and go away?

That largely depends on three things — at least foreseeable things that can be planned for. First, how long the decline in money supply will last this year. Second, if Britain decides to enact Brexit and leave the European Union on June 23. Third, if a yes vote on Brexit dominoes Greece into finally defaulting come July.
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The first checkpoint will be the Brexit vote. Though largely inconsequential on its own from a fundamental standpoint, it could easily rile markets because from there, the world will once again turn its eyes toward Greece. The New York Times is now reporting that another impasse is building between Greece and its lenders, as the Greek government has so far failed to meet its fiscal targets on its third bailout package, and it may again default come July 20 if even more cuts are not agreed to.

A vote for Brexit would give Greece an added push in the direction of its own Grexit because it would set a precedent for a country leaving the European Union. Brexit would increase the odds of a Greek default this summer significantly, and that could break the eurozone apart. If, in the midst of all this, the money supply has not recovered, then this could prove to be a very rough May to November period.

At bottom, selling in May this year is just a guess, but if the Brexit camp wins in June, then sell on June 24 and go away.

About the Author Trey Thoelcke →

Trey has been an editor and author at 24/7 Wall St. for more than a decade, where he has published thousands of articles analyzing corporate earnings, dividend stocks, short interest, insider buying, private equity, and market trends. His comprehensive coverage spans the full spectrum of financial markets, from blue-chip stalwarts to emerging growth companies.

Beyond 24/7 Wall St., Trey has created and edited financial content for Benzinga and AOL's BloggingStocks, contributing additional hundreds of articles to the investment community. He previously oversaw the 24/7 Climate Insights site, managing editorial operations and content strategy, and currently oversees and creates content for My Investing News.

Trey's editorial expertise extends across multiple publishing environments. He served as production editor at Dearborn Financial Publishing and development editor at Kaplan, where he helped shape financial education materials. Earlier in his career, he worked as a writer-producer at SVE. His freelance editing portfolio includes work for prestigious clients such as Sage Publications, Rand McNally, the Institute for Supply Management, the American Library Association, Eggplant Literary Productions, and Spiegel.

Outside of financial journalism, Trey writes fiction and has been an active member of the writing community for years, overseeing a long-running critique group and moderating workshop sessions at regional conventions. He lives with his family in an old house in the Midwest.