From Freddy Krueger on ‘A Nightmare on Elm Street’ to Damien in the ‘Omen’ trilogy, everything associated with Hallowe’en has a habit of re-emerging again and again. The same is true of the so-called ‘Halloween Indicator’in global stock markets.
A previous ‘Money Matters’ article on 13 October 2010 outlined the well-known Bouman and Jacobsen ‘Halloween Indicator’, also known as the ‘Sell in May and go away’ effect. Their original 2002 American Economic Review study has attracted a lot of attention in both the academic and popular press. Essentially, they found that returns during winter (November through April) are significantly higher than during summer (April-October) in 36 out of the 37 countries studied (including Ireland).
As outlined in a paper just out by Jacobsen and Zhang*, several other researchers have found the indicator to be present in out-of-sample tests. As the authors note, this means that the anomaly does not suffer from one of the curses of financial analysis, namely ‘Murphy’s Law’ whereby the effect seems to disappear or reverse after it is discovered. Of course, there are a number of caveats with these results, including possible data mining or lack of real economic significance.
Jacobsen and Zhang’s 2012 paper essentially re-tests the indicator by using the entire historical database for 108 stock markets across the world. Like Michael Myers in the ‘Halloween’ series, there’s simply no putting down the prevalence of the Hallowe’en effect. Overall, the 55,425 monthly observations over 319 years show a strong Hallowe’en effect. The winter returns – November through April – are over 4.50 per cent higher than summer returns and are higher in 81 out of 108 countries, compared to only two countries having significantly higher May-October returns.
In terms of geography, the Hallowe’en effect is more prevalent in countries located in Europe, North America and Asia than elsewhere. Jacobsen and Zhang found that the strongest Hallowe’en effect occurred since 1960 in developed Western European countries, such as Ireland and the United Kingdom. Indeed, Jacobsen and Zhang put a particular focus on the long-term history of UK stock markets as the old market adage ‘Sell in May and go away’ originated there. Using quotes from brokers working in the London since the 1930s, they speculate that the origins of the hypothesis originated from the English upper class spending winter months in London, but spending summer away from the stock market on their country estates.
Although there is no clear reason why the indicator still works now that summer holidays are a very different affair, the evidence reveals that UK investors would have remarkable odds of beating the market by sticking to the adage. With an investment horizon of ten years, Jacobsen and Zhan found that the chances of the Hallowe’en strategy outperforming the buy and hold strategy to be 90 per cent.
Overall, this new evidence suggests that the Hallowe’en indicator is a pervasive market anomaly that has strengthened rather than weakened in recent years. Whatever the reasons behind the effect, now that November is almost upon us, it may be time to invest if we trust that the indicator is a ‘treat’ and not a statistical ‘trick’.
- Jacobsen, B. and C.Y. Zhang. ‘The Halloween Indicator: Everywhere and all the time,’ Massey University Working Paper October 1, 2012.