Summer’s lore beats the odds

... but usually it falls at the first

IT’S been a stinker of a summer on the stock market. The FTSE All Share has fallen more than 8pc since June, as Greece and China formed an unlikely tag team in destabilising global markets.

This year it definitely paid to observe the stock market adage: ‘Sell in May and go away, don’t come back till St Leger’s Day.’

The theory behind this proverb is that investment managers go on holiday during the summer months, leading to thin trading volumes. A small amount of selling can therefore trigger big price falls.

The fund management industry return to their Bloomberg terminals around the day of the St Leger Stakes flat race, which takes place today, so it’s best to stay away from the market in those volatile summer months, or so the story goes.

This old City yarn has a certain dusty charm to it, but the statistics suggest it isn’t a good horse to back, in fact it has more than a whiff of something which might need to be cleaned off the stable floor after the race.

Over the past 30 years it has paid to stay out of the stock market from May to September on just 11 occasions, so a little over a third of the time. In racing terms that’s like betting on a horse at odds of two to one. Worth a flutter at the track maybe, but if it came down to your pension you’d rather bet against it by keeping your money invested.

The average return harvested over those summer months is 0.9pc. That may not sound like a lot, but the actual returns you would give up by stepping out of the market are much greater than this number might suggest. Not only are you giving up that 0.9pc each year, you are giving up all the compound growth on that return too. Over time that adds up to quite a lot of winnings.

If you had invested £10,000 in the UK stock market at the beginning of 1986, that would now be worth £149,740. By taking your money out of the market for June, July and August of each year, you would have reduced your pot to £125,320.

Throw in the costs of selling and buying each year and you quickly arrive at the conclusion that it is far better to stay invested throughout the summer than to arrange your portfolio according to the horse racing calendar.

Statistically speaking, however, there are some months which are unluckier than others.

Looking at the FTSE All Share over the past 30 years, June is the only month which has posted negative returns more often than positive returns, with the market falling by 0.7pc on average. September has a better hit rate than June, but a lower average. The market has made positive ground more than 50pc of the time, but investors have lost 0.9pc on average.

October has a reputation for being a bit ‘crashy’, and history bears this out to some extent.

The collapse of Lehman Brothers prompted the UK stock market to fall 12pc in October 2008, and, in the crash of 1987, 27pc was wiped off the stock market on October, the worst performance i n any month by quite some margin.

But despite the depths occasionally plumbed by the stock market in October, statistically it isn’t actually a bad month to be invested. Returns have been positive more than 70pc of the time, and on average you can expect to make 0.5pc in October, despite the cataclysms of 1987 and 2008.

For any seasonal trading strategy to pay off, not only does it have to overcome the costs of entering and exiting the market, the data also has to deviate sufficiently from the average to suggest there is more than random chance at play.

The St Leger’s Day adage is undoubtedly a flop on this score, but there is one seasonal effect which gains a great deal of support from historical data, and that’s the Santa Rally. Investors get a positive return 85pc of the time in December, typically banking a profit of 2.6pc in just 31 days.

These results are head and shoulders above all the other months, suggesting there is more than blind luck at play here. If every month were like December, the stock market could be expected to return a phenomenal 36pc a year. Perhaps Wizzard were right about wishing it was Christmas every day. Laith Khalaf is a senior analyst at Hargreaves Lansdown