Sell in May? Maybe not五月欲抛售?稍安勿躁


Pitcher Partners2
by Adam Stanley

It’s an old truism that markets slow down between May and October, and May is the time to sell.

And on the face of it, statistics would seem to agree. Since 1950 the Dow Jones Industrial Index has had an average gain of 7.5% between November and April and only a 0.3% gain over the May to October period.

The problem with these statistics is that they are only averages. The second period, May to October, does incorporate some unusually horrible Octobers (1987, 1989, 1997, 2002 & 2007).

So the big question for investors right now, is should we be following suit and selling out of the markets in anticipation of the May to October slowdown? Only time will tell however, there will be a confluence of events in this period that we’ll need to consider.

First up, in a local Australian context, there’s an upcoming election, and elections always disrupt the market as investors adopt a ‘wait and see’ attitude as regard the outcome. The Australian election is tipped to be close, and it’s likely that market conditions will soften while Australians wait to see whether there will be a change in government.

Thinking about global trends and impact drivers, the US and Spain are facing elections, and the UK will vote on BREXIT – the decision on whether Britain leaves the European Union. Further tensions over refugees will likely heat up again over the European summer months.

It’s also reporting season both here in Australia and in the US, and central banks and the IMF show further signs of downgrading their growth outlooks. Both the ECB and Japan seem to be at the end of their conventional easing programs, and the US is likely to lift interest rates again in the near term.

And this is all against a background of general global market volatility that has dogged the first two quarters of 2016.

While this sounds rather bearish, there are also some bright spots. The US Federal Reserve is no longer advising that foreign markets are a risk to the US economy; they at least believe that some of the market volatility has stabilised a bit.

Furthermore, the US economy is doing comparatively well, and China seems to have lifted again. Europe appears to be gaining some traction on the growth side and unemployment is starting to drop, albeit very slowly.

All in all it seems most likely that over May to October, we’ll muddle our way through these more stringent economic times. But it’s going to be a bumpy ride.

In any case, we would certainly not be selling out of the equity market on masse.

The problem with looking back over the last 66 years is that we are dealing with averages, and contrary to the narrative, there have also been periods where the market has rallied strongly between May and October.

Short term periods of volatility will always exist. But in the grand scheme of things they are mere blips on the long term market ride. History has taught us that over the long term, markets tend to climb.

As always, it’s important not to get caught up in the short term noise and miss out on the long term gains.