Investors have been spooked by the Russia Ukraine war, rising inflation and now the cost-of-living crisis, adding volatility to global stock markets in the first few months of 2022.

But the age-old adage suggests that the summer months are prone to market upsets, with some investors choosing to avoid activity during this time.

However, in reality, the ‘sell in May’ theory has little to do with the perceived risks of being invested during the warmer months and is instead rooted in the social calendar of a bygone age.

It dates from the time that stockbrokers would typically sign off work to enjoy the summer season, rich in sporting and social events. This included Royal Ascot, Wimbledon, Henley Royal Regatta, Cowes Week, and would end with the St. Leger flat race in mid-September.

As such, traditionally nothing much happens over the summer months so the theory goes that investors can reasonably sell their holdings in May and buy them back in September.

Putting the sell in May theory to the test

Online investment service Bestinvest looked at the performance of the UK stock market (as measured by the MSCI United Kingdom Index) during the months of May, June, July and August over the last 50 years.

Since 1972, UK share prices declined 46% of the time and rose 54% of the time, “indicating no strong overall pattern of either losses or gains”, Jason Hollands, managing director of Bestinvest said.

However, once dividend payments were included, as well as share price movements, the four months to August delivered a positive total return for investors 64% of the time.

Meanwhile, global shares (as measured by the MSCI World Index) saw positive returns 64% of the time, and 68% of the time once dividends were included.

Hollands said: “There is no doubt that there have been some particularly turbulent summers in the past – especially during the seventies – and it is these that cemented the views of some investors that the summer months are volatile. However, the eight times over the last fifty years when the UK stock market has posted double-digit losses during May-August have been matched by eight sizzling summers when the total returns made on UK shares were over 10%.”

Should the folklore be put to rest?

Hollands said that while there is no convincing case that the summer months are usually loss-making, analysis of the average monthly returns over the last 50 years revealed that historically June has been the worst month with an average decline in UK share prices of 0.92% (-0.60% once dividends are factored in).

Average returns have also been slightly negative in May too, with September another month that has seen a larger share of market slips.

By contrast, April, January and December have tended to be the best months for average returns, with a stock market ‘Santa rally’ in the run up to Christmas as this month typically enjoys a seasonal uplift.

‘Keep calm and carry on’

Hollands, said: “Current investor sentiment is being impacted by the war in Ukraine, soaring inflation, the prospect of sharp increases in interest rates and likely supply chain disruptions as a result of another wave of draconian Covid lockdowns in China. There are therefore plenty of reasons why some might take a cautious view on the short-term prospects for the stock market given this wall of worry.

“However, in truth it is virtually impossible to accurately predict short-term movements in the markets and history suggests that there are as many examples of very strong summers for share prices as there have been market slumps. The case for systematically avoiding being invested during the summer is therefore very weak and selling up now might mean missing out on eligibility for valuable dividend payments, as well as any improvement in fortunes after a tough start to the year and a lot of worry being priced into the market.”

He added: “Our view, is that it is wiser to ‘keep calm and carry on’ and take a long-term perspective when investing in the stock market rather than try to second guess what may happen over the space of a few months.”