Play safe as the markets take eyes off the ball
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 100 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 holidays, trading volumes and corporate activity dry up. Whilst the adage has its critics, and last year anyone who sold on May 1 and returned on September 15 would have missed out on a nine per cent 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 USDollar 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 June 23.
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 re- solving 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.
Research by WH Ireland since the turn of the millennium shows that in eight of the past 17 years investors would have lost money between May 1 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 May 1 the following year.
In terms of overall performance over this period, the FTSE100 lost an average of 1.8 per cent between May 1 and mid-September whilst it gained an average of 3.6 per cent in the mid-September to May 1 period.
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.