Summary
On average, stocks deliver close to zero returns from May through October. We hypothesize that this seasonal pattern is caused by an optimism cycle. With year end approaching, investors start to look towards next year, often with overly optimistic expectations. Several months into the year, the initial optimism becomes hard to maintain and the stock market experiences a summer lull. A global sector-rotation strategy based on this theory appears to be highly profitable. Global earnings growth revisions follow a seasonal pattern parallel to that of the stock market. Investors’ optimism as measured by the initial returns on IPOs almost completely captures the results of the sector-rotation strategy in a separate analysis for the US stock market. All these findings support the optimism-cycle hypothesis.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Anderson C.J. (2005) ‘Calendar and Reverse Calendar Effects: Time Peaks in Memory as a Function of Temporal Cues’. Memory 13(2): 113–123
Bouman S., Jacobsen B. (2002) ‘The Halloween Indicator, “Sell in May and Go Away”: Another Puzzle’. American Economic Review 92(5): 1618–1635
Cao M., Wei J. (2005) ‘Stock Market Returns: A Note on Temperature Anomaly’. Journal of Banking and Finance 29(6): 1559–1573
Chung R., Kryzanowski L. (2000) ‘Market Timing Using Strategists’ and Analysts’ Forecasts of S&P 500 Earnings per Share’. Financial Services Review 9(2): 125–144
Daniel K., Hirshleifer D., Subrahmanyam A. (1998) ‘Investor Psychology and Security Market Under- and Overreaction’. Journal of Finance 53(6): 1839–1885
Darrough M.N., Russell T. (2002) ‘A Positive Model of Earnings Forecasts: Top Down versus Bottom Up’. Journal of Business 75(1): 127–152
Dilsaver S.C. (1990) ‘Onset of Winter Depression Earlier than Generally Thought?’. Journal of Clinical Psychiatry 51(6): 258
Dimson E., Marsh P., Staunton M. (2002) Triumph of the Optimists. Princeton University Press, New Jersey
Easterwood J.C., Nutt S.R. (1999) ‘Inefficiency in Analysts’ Earnings Forecasts: Systematic Misreaction or Systematic Optimism?’. Journal of Finance 54(5): 1777–1797
Fama E., French K. (1993) ‘Common Risk Factors in the Returns on Stocks and Bonds’. Journal of Financial Economics 33(1): 3–56
Garrett I., Kamstra M.J., Kramer L.A. (2005) ‘Winter Blues and Time Variation in the Price of Risk’. Journal of Empirical Finance 12(2): 291–316
Gervais S., Odean T. (2001) ‘Learning to be Overconfident’. Review of Financial Studies 14(1): 1–27
Goetzman W.N., Zhu N. (2005) ‘Rain or Shine: Where is the Weather Effect?’. European Financial Management 11(5): 559–578
Hirshleifer D., Shumway T. (2003) ‘Good Day Sunshine: Stock Returns and the Weather’. Journal of Finance 58(3): 1009–1032
Jensen M.C. (1968) ‘The Performance of Mutual Funds in the Period 1945–1964’. Journal of Finance 23(2): 389–416
Kahneman D., Lovallo D. (1993) ‘Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking’. Management Science 39(1): 17–31
Kamstra M., Kramer L.A., Levi M.D. (2003) ‘Winter Blues: Seasonal Affected Disorder and Stock Market Returns’. American Economic Review 93(1): 324–343
Kelly, P.J. and J.F. Meschke (2004), The Link between Depression and Stock Returns: A Reexamination, working paper.
McNichols, M. and P. O’Brien (1996), Self-Selection and Analyst Coverage. GSB Research Paper #1412, December.
Richardson S.A., Teoh S.H., Wysocki P.D. (2005) Walk-Down to Beatable Analyst Forecasts: The Role of Equity Issuance and Insider Trading Incentives’. Contemporary Accounting Research 21(4): 885–924
Saunders E.M. (1993) ‘Stock Prices and Wall Street Weather’. American Economic Review 83(5): 1337–1345
Shefrin H. (2002) Beyond Greed and Fear. Oxford University Press, New York, United States
Taylor J.G. (1998) Investment Timing and the Business Cycle (Wiley frontiers in finance). Canada, John Wiley & Sons
Treynor J.L., Mazuy K. (1966) ‘Can Mutual Funds Outguess the Market?’. Harvard Business Review 44(4): 131–136
Weinstein N. (1980) ‘Unrealistic Optimism about Future Life Events’. Journal of Personality and Social Psychology 39(5): 806–820
Womack K.L. (1996) ‘Do Brokerage Analysts’ Recommendations Have Investment Value?’. Journal of Finance 51(1): 137–167
Author information
Authors and Affiliations
Corresponding author
Additional information
The author is grateful to Steef Bergakker for all the useful discussions about market dynamics through the years, which have contributed to the theory that an optimism cycle might exist. Special thanks go to Marno Verbeek for his very helpful suggestions. This paper also benefited from the remarks and suggestions from two anonymous referees.
Rights and permissions
About this article
Cite this article
Doeswijk, R.Q. The Optimism Cycle: Sell in May. De Economist 156, 175–200 (2008). https://doi.org/10.1007/s10645-008-9088-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10645-008-9088-z