What do you think?........
It is a saying familiar to many investors, and it's based on
an historical tendency of stockmarket under-performance during the six month
period starting in May and ending in October. The advice to investors is to get
out of equities over the Summer period, and re-invest in October, ready for a
Winter upswing. The logic underpinning this advice is that holding your
portfolio in cash or bonds through the Summer period will provide a better rate
of return.
The saying originated in the City of London, and when quoted
in full goes: 'Sell in May and go away; come back on St. Leger's Day'. St. Legers is a reference to the St. Leger
Stakes, one of Britain's oldest horse races, established in 1776. It normally
takes place on the second Saturday in September. I don't know when the saying
originated, but a professor of finance in New Zealand claims to have found an
article in the 1935 Financial Times that mentions 'Sell in May' as a long
established strategy.
But is there any truth to it? The effect was first noticed
in America, but has also been applied to the UK and Europe. In 2012 Ned Davis
Research produced data showing that had you invested $1000 in the S&P 500 between
1950 and 2012, using sell in May and buy back in October, your investment would
have grown to $75,539. On the flip side, had you bought in May and sold in
October over that period you'd have amassed a measly $1032. On the face of it,
pretty impressive numbers. Comparable research from the Stock Trader's Almanac
since 1950 shows the Dow Jones Industrial Average returning 0.3% from May
through October as opposed to 7.5% from November through April.
Of course there are years that buck this trend. In 2009 for
example, the FTSE 100 gained 20% between April 30 and October 30. In 2012 the
FTSE All Share Index finished almost 3% up between May and October, which
represented a small gain for those investors who chose to stay in the market.
And in 2013 The Dow gained 4.8% over the Summer period. Based on those figures,
'Sell in May' can hardly be taken as gospel. Gospel or not, it remains a staple
concept of stock market investment.
So what causes this seasonal shift? It could be down to the
natural business and economic cycles of the year. Over the December period for
example, technology stocks may tend to rise on the back of new products
released for the Christmas market. In the New Year companies can place large
orders that boost their recipients' sales results, and which subsequently feed through to higher share prices. Perhaps
the Winter time could be said to be a period of increased consumer consumption,
which in turn encourages investor confidence. In the Summer, however, investors
can close their positions when they go on holiday. According to the Stock
Trader's Almanac, June, August and September are the historical low points for
the Dow Jones. The increased investor activity levels of the Winter are simply
not reflected in the Summer, and the market simmers accordingly.
The 'Sell in May' phenomenon has been around a long time,
and has been used as an allegedly successful strategy by many long term
investors. But before committing to it there are some caveats to think about.
The transaction costs of getting in and out of the market need to be
considered, along with the possible capital gains tax that could be incurred.
For those holding dividend paying shares there is a case for staying invested
and using the principle of compounding to re-invest those dividends. Then there
is the simple alternative of just buying and holding. According to a study by
Motley Fool, based on the S&P 500 Annualized Return between 1926 and 2012,
buying and holding produces a 10% return. This is in contrast to 8.4% when
selling in May and buying back in October, and 5.1% for buying in May, then
selling in October.
There's also the issue of how much return your cash can
generate while you're out of the market. When interest rates are high then it
becomes an attractive option, but given current rates, not one you might wish
to exercise right now!
So what about 2014? As we enter May the markets are
experiencing uncertainty over the continuing and unpredictable situation in
Ukraine. If sanctions imposed on Russia start to hurt, we may see a response
from the Kremlin that adversely affects those in the West who currently do
business with Russia. Another downside factor in possible market performance is
the incidence of mid-term election year in the U.S. Historically stocks have
weakened from May through October in a mid-term election year, (as opposed to
presidential election years, where they strengthen), and the expectation from
pundits in the States is that 2014 will be no exception.
On the up side, there is optimism over continuing economic
growth in America, with Britain leading Europe in the GDP growth stakes at a
projected growth rate of 3% this year. And finally there's the unknown, such as
an unexpected world event or economic announcement. There is obviously no way
we can factor these in to any outlook we might care to have for the market this
Summer.
In summary, 'Sell in May' has some good historical data to
back it up as an investment strategy. As outlined above, a decision to use it
is dependent on consideration of whether you think you can do better over the
Summer with your liberated cash, whether you think it might just be better to
hold onto your stock regardless, or whether you will liquidate your holdings,
forget about the stockmarket, and spend the time relaxing in your chosen stress
free holiday hideaway.
Darren Winters
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