It is one of the oldest market sayings: ‘Sell in May, go away and come back on St. Leger day’. The reason this aphorism has stood the test of time is because it is spot on. After the rally since the market’s low seen on 6 March, which has taken the FTSE All-Share up by 13%, investors might like to approach the oncoming summer months with some caution, regardless of how bullish they are on equities and the global economy. It seems as traders head for the beach, volumes start to thin out and serious decisions get put on hold until the big hitters are safely back at their desks in time for autumn. Even if bullish investors are loathe to sell, a little hedging of positions may be in order, perhaps by buying the db-x-trackers’ FTSE 100 ETF (XUKS), just in case history does indeed repeat itself this year.
Hitting the history books
The St. Leger – the world’s oldest ‘Classic’ horse race, first run in 1776 – traditionally takes place the second Saturday of September at Doncaster’s Town Moor track. Shares has therefore delved into the history books to see what would have happened if an investor had bought equities on 1 January, sold them on 30 April and then bought again on 1 September for the final run in to Christmas.
Intriguingly 11 of the 45 years studied showed precisely the pattern of equities rising between January and April, falling between May and August and then rising again from the beginning of September until the end of the year. This phenomenon could be seen in 1965, 1966, 1976, 1984, 1988, 1992, 1998, 1999, 2004, 2006 and 2007.
This 25% hit rate for the trend might not sound like much but it conceals an even clearer trend once the numbers are assessed in greater detail. Shares’ research shows since 1964 the May-August period has massively underperformed the first four months of the year and also the final four months, giving great substance to the old ‘sell in May’ theory
At least investors do not tend to lose their shirts between May and August. But the average 0.3% loss over the past 44 years compares badly to the other two periods and means cash in the bank would have offered a better return. On only 11 occasions since 1964 has the middle third of the year offered the best returns, compared to 24 times for January to April, including the first quarter of this new year and 10 times for September to December. This trend can be more clearly seen in an assessment of the three periods by decade, as well as across the period as a whole.
The dominant performance of the year’s opening months is just as notable as the turgid showing from the middle term. January and April are historically the best months in which to invest, closely followed by December. The ‘January’ effect of strong performance is also a well-known market phenomenon. Although it is hard to explain exactly why the first month of the year is generally so strong the good showing is often attributed to the combination of punters approaching the new year with renewed optimism and institutional fund managers coming back to their desks and applying fresh funds to the market.
New year hangover
However the January effect does appear to have become progressively less potent. Only once this decade – 2006 – has the month been the year’s best performer. On six of 10 occasions the All-Share has actually fallen during this period, hampered by the 2000-2003 and 2007-2009 bear markets. What is interesting to note is December has so far put in just one negative showing this decade, as the last bear market neared its trough in 2002, as against eight profitable ones. It could just be that efficient markets are looking to anticipate and ‘price in’ the January effect, giving equities a pre-Christmas boost which then loses momentum as the New Year starts. This is certainly what happened this year when the rally which commenced on 21November ran out of juice on 6 January after a 23% surge.
Perhaps surprisingly it is September which traditionally throws in the worst performance of the year, even if October is always the most feared month, after the 1929 and 1987 market crashes.
Evasive action
If history is any guide even the most bullish investor will need to take evasive action between now and the next running on the St. Leger, which is scheduled this year for Saturday 12 September.
As the 1973-74 bear market neared its trough the April-August 1974 spell inflicted a 36% loss on the All-Share. As the 1990-92 market downturn drew to a close, the same four-month period featured a nasty 16% fall in the index, while the 2001-2003 downturn saw the quarter register aggregate losses of 10% in 2001 and 19% in 2002.
We may not find out until September if the bounce since 6 March is the beginning of a bull market as traders abandon their desks and head for the beaches. The UK equity market doubled in 1975 but May-August of that year offered just a 1.3% gain. In fairness 1993’s ongoing recovery saw the four-month period offer a year’s best 9.8% gain and 2003’s market bottom in March was followed by a tasty 11.2% spring-to-summer rise. But overall the record books suggest now is the time for a little caution, particularly after the healthy market recovery seen in March and Ap
