Sell in May and go away Although the market is priced quite high at the moment and the possibility of a correction cannot be excluded, Schalk Louw warns not to give in to your emotions, but to exercise proper discipline when it comes to your long-term ass
notonly do we currently face a stock market which is still trading at a 20-year high priceto-earnings ratio (P/E), but we also find ourselves in the month of May. Many warn against the coming winter. “Beware of the correction,” they say, “Sell in May and go away.” But last year I wrote an article in the 1 May issue on the same topic, and proved that May-sellers haven’t been quite as successful in the past. So what should we do? Should we be worried?
We all know that markets and share prices alike move up and down. When we look at these trends in Graph 1 over the longer term (and by longer term, I mean decades), however, two very important details become clear: The first is that the general trend is up. Stock markets are trading higher today than they did 10, 20 or 50 years ago. In fact, the market has delivered a return of almost 8% more than domestic inflation over the past 50 years. Secondly, it may move upwards, but it isn’t a one-way street and it definitely doesn’t come without potholes. These potholes or drops in market movements are also known as market corrections.
What is a market correction?
There is no one true definition for a market correction, but between traders, it usually indicates a drop of 10% or more from peak market levels. In today’s terms, this would mean a drop from our current 54 000 levels down to 48 600 and lower.
Such a massive drop may seem impossible, but the truth is that the FTSE/JSE All Share Index has experienced at least 11 corrections of 10% or more since January 2000.
It may sound like a lot, but the fact is that it isn’t such a strange occurrence at all. Everyone is focusing on the last 12 months’ sideways stock market movements, but few realise that we have already experienced two corrections of 10% or more over the same 12-month period.
Is the market cheap or not?
The market definitely isn’t cheap at the moment and at its current P/E of 21.4 times, it is trading at its highest levels when compared to its 20-year average of 14.8 times (see Graph 2).
So, sell in may and go away?