Sell in May and go away?
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.