The saying goes back to the days when Londonstock brokers took the summer off to launch their “gels” into high society and enjoy the sporting season of Ascot, Cowes, Henleyand so forth, ending with the St Leger flat race over the second weekend in September. With professional investors away racing and shooting over the summer, October to April came to be seen as the serious months for investing, when markets would rise strongly.
An element of this mentality remains in the psyche of the investment community today, with the serious work beginning in the autumn, building up to the Budget, the ISA season and the end of the tax year, all normally long gone by the end of April.
So is it true? Do markets languish in the summer and take off again in the autumn?
On average, the stock market actually loses 1.8% of its value each summer. Compounded over a couple of decades, that makes for a tidy sum…an overall loss of 30%.
In fact, I read recently that following the old saying since 1984 would have returned 55% more than a simple buy-and-hold strategy and that the ‘sell in May’ rule has worked for UK shares ever since 1964.
Overall, in the last 40-odd years, British investors have been 50% more likely to suffer a down month between May and October than between November and April.
Still, “Sell in May and go away” isn’t quite perfect. It suggests buying back in September…but October’s usually rubbish too! This is the month the markets crashed in 1987, 1997, 1998, and most famously in 1929.
So how do prospects look now: since May the markets have fallen from 6100 levels to 5000 levels – a substantial 18% fall. Maybe it is time to say that the shares are cheap and prices will start to climb before the economy really recovers. If I was a gambling man I should be right now choosing my “horses” so to speak ready for the off.
Whereas I am cautious, I am ready to take a risk knowing that if and when prices turn, they could do so quickly and sharply, and investors will not want to be out of the market at that point.
The Americans have their own version called the Halloween indicator, which advises investing between November and April for the best returns. Again this is not without kernels of wisdom. Some of our most spectacular crashes have occurred in October, not least 1929, 1987 and 1991. Furthermore, this summer high levels of debt are likely to suppress economic activity as individuals and governments try to reduce their borrowings.
Some commentators fear any rally on the back of talk of “green shoots” could be a treacherous illusion, like the rally in theUS market in 1931, before the index began to fall again. What followed was the second and most damaging leg of the Great Depression.
Last Friday we saw Ben Bernanke give his long awaited speech: although he made no commitment he seemed to say he wants to do more QE. I think it is abundantly clear he believes the Fed needs to do it as soon as operationally possible…
The markets, seeing the enlarged schedule for the September meeting and interpreting the likelihood of heavy discussions, have gotten the message. Stocks in the USA on Friday threw off the daily mortal struggle that is life as Bank of America and bid for the QE future that is now September (good riddance to August apparently). Gold prices followed on those expectations of a resumption to the wilful and wanton dollar destruction that QE purely represents.
So are the markets now going to stage a rally in anticipation of more free money from the Fed or in anticipation of other actions by the Obama administration to strengthen the housing market, provide new jobs and stimulate the economy.
So what do I do?
Do I buy on St. Legers day ?
Maybe I will try a pre-emptive strike. And Buy Now !