Should you sell in May this year?
The market adage looks unlikely to apply in 2024, says Max King. Global equities are proving resilient
There is a rule of thumb in the City that you should buy a share if it goes up on bad news and sell one if it goes down on good news. The reason for this is that the share price tells you very quickly whether the good or bad news is already discounted, implying that the collective wisdom of traders and investors is more useful than the individual opinions of analysts.
This principle also applies to markets, as reflected in the adage that “bull markets climb a wall of worry”. They have certainly been doing that so far this year. Expectations of cuts in interest rates in the UK and US have been postponed and reduced.
This is partly due to some disappointing inflation numbers and partly to the strength of the US economy. The yield on ten-year government bonds has risen 0.7% to 4.2% in the UK and 4.5% in America, raising the valuation hurdle for equities to climb over.
The price for benchmark US oil futures, known as West Texas Intermediate (WTI), has risen by 17% to $83.60 owing to the conflict in the Middle East, which, it is widely feared, could worsen. Damage to Russia’s energy infrastructure and robust demand are also underpinning prices.
The price of Brent crude, which is of better quality, is $4 higher and threatens to breach $100. The price of gold, widely regarded as a good hedge against inflation and political uncertainty, has risen by a third to $2,400 an ounce since 7 October 2023.
Budget deficits, we are told, are out of control, and national debt spiralling upwards makes a crisis of government solvency inevitable. The UK and most of the European economies are barely avoiding recession. Growth is robust in the US and corporate earnings are increasing at a brisk pace, but this is reflected in a stockmarket multiple of 20 times this year’s earnings.
Overhanging all this is the threat of China invading Taiwan, a widening war in the Middle East and, perhaps, a third world war. Brutal wars continue in Africa, Haiti has descended into anarchy and there is no sign of venal and incompetent regimes being under pressure anywhere nominally at peace. There is even a film on release postulating civil war in America – which sends the message that we should forget about it being the world’s policeman.
Onwards and upwards
Yet the world’s stockmarkets are all up this year. Every time equities stumble and the armchair pundits jump up and down with excitement that a bear market is upon us, the setback fizzles out and the market recovers. It is getting very difficult to see what, short of the apocalypse (which environmental fanatics predict with unshakeable confidence) will seriously knock markets.
What, then, is the good news that everyone is so enthusiastically ignoring? James Ferguson of MacroStrategy says that “US inflation isn’t sticky or 3.5%. It’s only 1.2%”. He argues that 1.2% of the increase stems from “the lagged effect from shelter, which we can confidently expect will steadily decline over the next 12 months.”
Shelter, or housing costs, comprise 36% of the consumer-price index. It has a long history of
“Con ict in the Middle East will probably zzle out, as it so often does”
lagging house-price and general inflation, both now around 2%, by about a year, so it is set to fall back significantly. Another 1.1% of the inflation rate was due to a 22.2% year-on-year jump in motor insurance in March, which was driven by “a shift... in favour of electric vehicles”, which are pricier to insure. Ferguson likens this to “exogenously imposed taxes, crowding out other spending”. So generalised price rises were in fact only 1.2%.
Ed Yardeni of Yardeni Research also disagrees with “the evolving consensus. We continue to believe that inflation rates should fall to 2%-2.5% year on year by the end of the year”. This means that interest rates will fall more than the market now expects, and that government bond yields should retreat.
Higher oil prices are likely to encourage more output, conflict in the Middle East will probably fizzle out, as it so often does, and Russian armies may not sweep westwards. Xi Jinping may see that an invasion of Taiwan would, at best, be a colossal Pyrrhic victory.
America may decide that although it would like to retreat from being the global policeman, such a strategy would not “Make America Great Again”, impressing neither friends nor enemies.
As 2025 approaches, the prospective multiple of the US market will drop to a more reasonable 18. The cash generation of listed markets allows for plenty of dividends and share buybacks, reducing the supply of equities. Government finances will remain very stretched, but that may provide an impetus to implement greater efficiency and less extravagance, or make it inevitable before long.
The “sell in May” adage has not worked well in recent years. It tends to apply when markets run too far early in the year due to a surge of optimism, but they have not done that this year. Instead, they have advanced moderately despite a surge of pessimism. April has probably brought as much of a setback as we are likely to get, so don’t sell. Buy, but be prepared to be patient.