Sell in May and go away?

At this time of year, we’re usually reminded of the investment adage ‘sell in May and go away, don’t come back til St Leger’s Day.”

The saying dates back to a time when stock market traders spent most of the summer months away from their desks, attending social or sporting events. As a consequence of less trading taking place, any market sell-offs were amplified. So it was suggested that investors would be better of selling their holdings and reinvesting in September when the traders returned.

Looking back over the past 30 years or so, there is little evidence to suggest that investors have benefited from timing the market in this way – some years they do, others they don’t.

And of course, this year, there are no social or sporting events to attend any way – all have either been cancelled or made ‘spectator-free’ as the world battles to contain the Coronavirus.

Which way for markets now?

The FTSE 100 started the year at a level of 7,604, but after the fastest stock market crash in history, it hit a low of 4,994 on 23 March 2020, as lockdown began and the global economy came to a halt.

Last week, the UK stock market briefly popped its head above 6,100, before dropping again and ending the week on 5,762. Is this just a blip in the fastest ever market recovery too, or is it what is known as a ‘dead cat bounce’ and will the stock market will fall further in comping weeks?

Technically in a bull market

Royal London Asset Management’s chief investment officer, Piers Hillers, pointed out last week that: “Remarkably, the global equity index has rallied over 25% since its trough towards the end of March. Indeed, April saw the greatest rally for US equities since 1987. So, despite the dire economic data we keep seeing, we are technically in yet another bull market for equities.

“Bull markets are not easy and tend to climb a wall of worry, evidenced by a trade-off between greed and fear, with lots of plausible reasons for caution justifying the type of correction we saw towards the end of the week.

“The investment outlook remains uncertain. But markets are functioning better week by week as central bank and government support packages start to come through. The first acid test of the robustness of those markets starts now – as initial economic data starts to come through, which will undoubtedly be very bad.”

Dead cat bounce?

Schroders’ head of research and analytics, Duncan Lamont, commented: “Fear and pessimism, and greed and optimism, have played prominent roles through the ages. As a result, analysis of how investors and markets have behaved in the aftermath of historic crashes can provide useful insights into how they might behave this time around. And give clues as to how likely it is that the stock market has really turned a corner.

“Looking at the US, in 11 of the 13 previous historic episodes since 1885 where the Dow Jones index has fallen by at least 25%, there has been a rebound of at least 10% somewhere on the way to the bottom – a false dawn, also known as a “dead cat bounce”.

“Usually there has been more than one; the average number in any big down-market has been around three. There were four in each of the global financial crisis and the dotcom crash.”

Juliet Schoolling Latter, research director of Chelsea Financial Services added: “It’s very easy to get caught up in collective fear and optimism, but trying to time the market is notoriously difficult.

“Most investors tend to be better off doing nothing or investing monthly to take the emotion and stress out of their investment decision-making.

“As investment advisors to the VT Chelsea Managed fund range, we try not to make these big timing calls ourselves, instead preferring to add a little on stock market dips and selling small amounts when markets have risen.”

Find out more about the VT Chelsea Managed fund range

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the fund manager or commentator and do not constitute financial advice.

Published on 04/05/2020