Of all the stock market adages, Sell in May and Go Away is one of the better known. Its popularity is supported by evidence that, over the long run, it’s not bad advice: analysing data going back more than a hundred years shows that stock markets tend to produce better returns between mid-September and the end of April than they do between May and St Leger Day (September 16 this year, a date for readers’ diaries).
The theory goes that markets lack any clear direction over summer as many of their participants – bankers, fund managers, brokers etc – are rarely seen at their desks. Whilst the Bribery Act 2010 may have curtailed some of the more excessive corporate entertaining, summer brings with it a slew of fine days out at social occasions such as Henley, Ascot and Glyndebourne. I mean who in their right mind would want to be stuck in the office when they could be eating their strawberries and cream at Wimbledon? Coupled with the long summer hols (south of France, natch), trading volumes and corporate activity dry up.
Whilst the adage has its critics, and last year anyone who sold on 1 May and returned on 15 September would have missed out on a 9% rise in the FTSE-100 Index, it may look more tempting this year with indices touching new record highs. We have commented in this column before that the stock market’s resilience in the face of the biggest uncertainty for at least a generation, ie Brexit, has been nothing short of remarkable. Although the devaluation of Sterling against the Euro and US Dollar has increased the attractions of the UK stock market to overseas investors, the smaller company indices such as the FTSE SmallCap and AIM, which have less exposure to currency benefits, have also performed exceptionally well since 23 June.
This brings to mind another adage which is that markets climb a wall of worry. This is a reference to the stock market’s seeming ability to continue to march forward in the face of negativity believing that issues always find a way of resolving themselves. In the case of Brexit, it could be argued that it is not just financial markets that fall into this category.
It remains to be seen at a macro level whether more recent subdued surveys of consumer confidence turn out to be a blip or the start of a longer-term trend. Certainly any froth in the housing market last year looks to have petered out. The devaluation of Sterling, whilst good news for manufacturers and exporters, comes at a price to the rest of us. It makes everything that bit more expensive which in turn pushes up inflation and – in the absence of any real wage growth – leaves less left over to spend every month. This ought to be a real concern for investors holding consumer-facing stocks at this point in the cycle.
Another adage, and one that may be most pertinent in the current environment, is that when the last bear turns bullish it’s time to sell. Whilst this may not be universally true in today’s market, most of the participants we speak to (at least those poor souls who are stuck at their desks) are surprisingly upbeat. Investors are deploying cash, companies are raising new capital and valuations are becoming full by historical standards (especially some of those on AIM stocks in IHT mitigation portfolios). This should naturally be met with a helping of scepticism as the summer season gets underway.
Whilst past performance is no guide to future performance, our final adage of this piece, history would seem to be on the side of being out of the market over the summer months. Like the pros, investors should spend their time enjoying the sun rather than worrying about the stock market.
JUST HOW GOOD IS THE SELL IN MAY ADVICE?
Research by WH Ireland since the turn of the millennium shows that in 8 of the past 17 years investors would have lost money between 1 May and mid-September had they been invested in the FTSE-100 (excluding dividend payouts). Conversely, investors would have made money in 14 of those years between mid-September and 1 May the following year. In terms of overall performance over this period, the FTSE-100 lost an average of 1.8% between 1 May and mid-September whilst it gained an average of 3.6% in the mid-September to 1 May period.