LONDON — It is the oldest stock market adage in the book: “Sell in May and go away.” Old City of London hands say one of the best ways to play the markets has always been to clear out your portfolio on the first day of this month, head off down to the country, and not bother doing anything for the next six months.
As it happens, it doesn’t always work. For the last five years, the benchmark S&P 500 index has been up in May and you’d have lost out by selling too early. This year, however, it is likely to be good advice. There are four good reasons why the next six months are likely to be very choppy for equity markets. We are deep into one of the longest bull markets in history, there are clear signs that the global economy is slowing down, interest rates are still heading up, and U.S. President Donald Trump’s trade wars are quite rightly going to rattle investors.
No one is quite sure where the “sell in May” mantra originated. It might well have its roots in the Victorian City, when well-to-do bankers and brokers preferred to get away from the heat of London for most of the summer, and paid more attention to the horse racing and cricket than the economy. Over the decades, however, it has proved to have a slight but significant statistical under-pinning. Most gains in the equity markets tend to come between November and April, while the summer months are flat at best and sometimes catastrophic.
There are big variations within that, of course. In 1974, you’d have lost 21 per cent on the S&P 500 between May and November, in 2008 you’d have been down 25 per cent and in 2002 by 27 per cent, according to the Stock Trader’s Almanac. But in 2009 you would have lost out on a 23 per cent gain by sitting out those six months, in 1958 you’d have lost 17 per cent and in 1982 15 per cent. So it is a mixed bag. On average, summer does worse than winter, but that isn’t true every year and sometimes stocks surge ahead. It isn’t a hard and fast rule.
Given that it is May, how is this year likely to work out? It looks like it is going to be a rough for few months for equities. Here’s why.
First, we are already a long way into a bull market. There are different ways of measuring it, but if you take the S&P 500 as the benchmark, the bull market celebrated its ninth birthday on March 9. That is a heck of a run. At 110 months, it is second only to the epic bull run that ended when the dotcom bubble burst early in 2000. If it can stagger through to the end of the year, it will be the longest bull run on record, at least by duration rather than percentage gain (even though the index has tripled in value since 2009, it still has some way to go to beat the 400 per cent gain of the Nineties or the nearly 500 per cent run up in the Dow Jones index from 1921 to 1929.) Bull markets don’t necessarily die of old age or exhaustion, so there is no reason why the markets can’t still go up a bit more. But it does mean everything is already very expensive, with no bargains. That makes it more likely equities will be flat at best and may well see a sharp correction over the summer.
Next, there are clear signs that the global economy is slowing, especially in Europe. There have been a string of poor numbers out of Germany, confirmed by yet another drop in retail sales reported on Monday.
What is meant to be the motor of the eurozone economy is spluttering, and while most mainstream economists dismiss that as a blip, with the terrible winter weather largely to blame, poor figures out of France suggest something more serious is happening.
In Britain, growth has already slipped to a negligible 0.1 per cent. Commodity prices are starting to surge globally, led by oil, which will put even more pressure on economies that are starting to struggle. Over the summer, investors may start to work out that the recovery that started in 2009/10 is petering out, and that the eurozone is not about to stage a sustained upturn. And once they figure that out, the only response will be to start selling the markets.
Thirdly, interest rates are still going up in the U.S. The Federal Reserve has already increased rates six times, with the latest rise last month taking them to 1.75 per cent. It has indicated that rate rises may accelerate from here on. The new chairman, Jerome Powell, has a reputation as a hawk, and clearly does not see supporting the stock market as part of his job. There will be no “Powell Put,” and certainly nothing to match the “Greenspan Put,” which meant the Fed was minded to cut rates every time the S&P 500 wobbled.
That might be the right decision for the American economy. It is recovering faster than any of its major rivals, and President Trump’s tax cuts will give it an added stimulus. But it does mean the markets will be under a lot more pressure — because rising rates are often bad for equities.
Finally, watch out for global tensions. While geo-politics usually matters far less to the markets than most pundits assume, Donald Trump’s determination to rip up the global trading system could be hugely damaging. He has already imposed a range of tariffs, provoking the Chinese to retaliate. The European Union may well hit back with levies on U.S. goods, and if that happens the world may be plunged into a full-scale trade war.
That matters. The integration of global supply chains has been the key driver of growth over the last two decades, and any disruption will wreak havoc with corporate profits.
The statistical record on selling in May is mixed. Sometimes it saves you from big losses, other times you miss out on major gains, even though there is a slight bias against the summer months. But in 2018, it may well prove great advice. The markets should have calmed down by November, and they could also be a lot cheaper.
The Daily Telegraph