Sell in May and go away? Probably not!

By Jim Power

 

There is an old adage in equity markets that one should ‘sell in May and go away’. This is predicated on the view that one would be sensible to get out of equity markets at the end of May and buy back at the end of the Summer holidays in early September. During the summer months trading conditions in markets tend to be lighter as traders and investors go on their holidays and are not anxious to put on large positions. Furthermore, over the years we have seen negative events happen more often during the summer months, with the bursting of the US sub-prime bubble a case in point a decade ago.

 

However, investors need to be careful not to confuse an ‘old wives tale’ with sensible investment advice. Different markets behave differently and events in individual markets tend to drive the performance of those markets, rather than some dubious rule of thumb.

 

Over the 10-year period, 2008 to 2017, the US Dow Jones Industrial Average fell on four years in the period between the end of May and the end of August. In 2008, it fell by 8%, by 8.2% in 2011, by 1.8% in 2013 and by 8.4% in 2015. In the case of the UK FTSE 100 in contrast, the UK market declined 7 times between the end of May and the end of August. In the case of the German DAX, declines were recorded in 6 of the years. Interestingly, all three markets fell together in 4 of the years.

 

What does all of this tell us? Well, it seems to tell us that it would not be profitable every year to sell in May and buy back into markets in early September. Some years it might work, other years it might not.

 

The sensible approach for investors to take is to analyse each market in isolation and if the analysis comes up negative, then it might be wise to sell, regardless of what time of the year it is. However, investors should also consider their time horizon very carefully. While we have seen a number of declines in May to August period in the three markets considered, the annual performances have been better. If we look at the full year performance of those markets, the story is somewhat different.  In the period from 2008 to 2017, the Dow Jones declined just 2 out of the 10 whole calendar years; the FTSE 100 declined just 4 times and the German DAX declined just 2 times.

 

On balance selling in May and going away does not appear a sensible strategy. The fundamentals of investment should drive investor decisions, with tolerance for risk and the investment time horizon important considerations.

 

Should one have sold at the end of May this year and buy back into markets in September? Who knows. In the first 5 months of 2018, markets have been somewhat more volatile than in recent years, but most markets are in modestly positive territory, and those that are negative, are also modestly so. Considering all of the uncertainties around trade wars, global geo-political tensions, the Italian election debacle, the ongoing Brexit farce, and the obvious modest softening of economic activity in the Euro Zone, markets have proved quite resilient. Economic growth is still generally positive at a global level, negative interest rate shocks are looking unlikely and corporate earnings are still growing at a healthy rate.

 

Equity markets still appear to be the investment vehicle of choice for global investors, but there is still a sense that the increased nervousness and volatility we have seen in markets this year will remain a feature over the remainder of the year. It is worth noting that a small number of technology stocks in the US are contributing significantly to the overall performance of US markets. In overall terms, care and caution is still required.