Sell in May and go away?

Finweek English Edition - - INSIDE - BY SCHALK LOUW Port­fo­lio Manager at PSG Wealth

On 24 April, the FTSE/ J SE Al l Share I ndex closed at 55 188.34, the f irst time ever it closed above the 55 000 level. The past 12 months’ bull run con­tin­ues a nd, while many cel­e­brate t hese good t i mes, ot her s war n ag a i nst t he “win­ter” that l ies ahead. “Be­ware of t he cor­rec­tion,” t hey say, “Sell i n May and go away.” What should we do? Should we be wor­ried?

We all know that mar­kets and share prices alike move up a nd down. When we look at th­ese trends in graph 1 over the longer term (and by “longer term” I mean decades), how­ever, you wil l note t wo ver y dis­tinct char­ac­ter­is­tics: Firstly, the gen­eral trend is up. Mar­kets are trad­ing higher to­day than they did 10, 20 or 50 years ago. In­fact, you would have yielded a re­turn of al­most 8% more than do­mes­tic in­fla­tion over the last 50 years.

Se­condly, this up­wards high­way is not a ‘one-way’ and it most cer­tainly does not come with­out ‘ pot­holes’. Th­ese ‘ pot­holes’ or de­creases in the mar­ket are known as mar­ket cor­rec­tions.

WHAT IS A COR­REC­TION?

There is no one true def­i­ni­tion for a mar­ket cor­rec­tion, but a mong traders it usu­ally in­di­cates a 10% or more decline from the mar­ket’s peak. In to­day’s terms, t his would mean a decline f rom t he cur­rent 55 000 level to 49 500 and lower. This may look like a mas­sive decline and seem in­con­ceiv­able.

The FTSE/ JSE All Share In­dex, how­ever, has ex­pe­ri­enced at l east nine cor­rec­tions of 10% or higher since Jan­uary 2000.

It may seem like quite a lot, but when we take a closer look at the cir­cum­stances sur­round­ing t hose cor­rec­tions, we will note t hat t he econ­omy was ei­ther ap­proach­ing, or in the mid­dle of a re­ces­sion. We have had two world re­ces­sions in the last 15 years: from 2001-2002 and 2008-2009.

IS THE MAR­KET CHEAP OR NOT?

There is no guar­an­tee that just be­cause we don’t cur­rently find our­selves in a re­ces­sion that there may not be a cor­rec­tion. The fact is that the mar­ket isn’t cheap at the mo­ment and at its cur­rent price-to- earn­ings ( P/ E) ra­tio of 19 times, it is trad­ing much higher than the 20-year av­er­age of 14.8 times (see graph 2).

SO SELL IN MAY AND GO AWAY? There may be a num­ber of ‘ bears’ who will tr y to stop me r ight here with the well-known say­ing: “I told you so. Sell i n May and go away.” Well, my re­sponse is sim­ply that this doesn’t of­fer us any guar­an­tees for a cor­rec­tion ei­ther. Had you man­aged to do an av­er­age-priced sel l ever y May for t he past 20 years (19 May months), t he mar­kets would have been higher dur­ing t he De­cem­ber months of those same years, 74% of the time. In other words, the ‘sell-in-May bears’ would have only made the cor­rect call 26% of the time.

The bot­tom l ine is that although the mar­ket is quite ex­pen­sive at the mo­ment, and one can­not ex­clude the pos­si­bil­ity of a cor­rec­tion, it still pays to be dis­ci­plined with your long-term as­set al­lo­ca­tion and not to give in to your emo­tions. Stay fo­cused on the pos­i­tive trend over the long term.

ALTHOUGH THE MAR­KET IS QUITE EX­PEN­SIVE

AT THE MO­MENT, AND ONE CAN­NOT EX­CLUDE THE POS­SI­BIL­ITY OF A

COR­REC­TION, IT STILL PAYS TO BE DIS­CI­PLINED WITH YOUR LONG-TERM AS­SET AL­LO­CA­TION.

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