As May approaches, I figured it'd be a good time to summarize the historical evidence for/against "selling in may and going away" and the evidence for investing more or less during certain years of the election cycle. Here is a quick summary, using S&P 500 return data from 1926-2014.
S&P data from Roger Ibbotson (nominal returns)
Stocks have performed better in the months of Jan, Feb, Mar, Apr...Nov, Dec. They have done worse (but still delivered solid returns) in the months of May, Jun, Jul, Aug, Sep, Oct.
If, since 1926, you'd sat on the sidelines between May and October every year, your returns would have been considerably worse (6.91%) than a simple buy and hold approach (10%)--to say nothing of the increased taxes and turnover such a strategy would require.
Because you always want the odds in your favor, its also important to note that the S&P 500 has delivered a positive return in 65% of the May-October periods since 1926.
Election cycle years also have different annualized returns. Year 3 is by far the best and Year 2 (also referred to as a mid-term election year, where we are today) is the worst.
Combining "sell in May" and election cycle years, here are the average May-Oct returns broken out by election cycle year. No clear reason for caution in year 2 of the cycle.
Here are the year by year results:
S&P data from Roger Ibbotson (nominal returns)
While mostly positive, there are some very negative observations--one of which (2008) helped drive the popularity of the "sell in May" strategy.
But implementing a timing strategy is very psychologically difficult. Imagine selling in May of 2008. You'd have felt like a genius come November, but do you really think that you'd have stuck to the strategy and bought back into the market in November of 2008? That would have taken extreme discipline.
The bottom line is that selling in May and returning to the market in November has been an inconsistent strategy and one that would require perfect discipline to implement (not a typical investor forte). If you are a long-term investor, you'll inevitably have to ride out tough periods of performance. I say keep your eye on the long term prize. Even if this turns out to be a bad year, over the long term its better to stay put.