Should you sell in May and buy another day? (Filed: 30/04/2005)
What is surprising is that not only is "sell in May" a successful strategy, it is one which is shared across the world. On Wall Street, there is: "Sell in May and buy again on Labor Day" (the first Monday in September, after which the holiday season ends and Ivy League types are supposed to put away their white shoes for the winter).
And according to Robin Griffiths, a strategist at Rathbone Brothers, the Japanese have an expression which goes: Setsuban Tenjo Higan Zoko. That may not be quite as catchy as the St Leger version, but it roughly translates as "Ceiling at Setsuban and low at Higan" (two festivals).
Says Griffiths: "It is an old expression, but it is borne out by the figures. According to the latest edition of the American Stocktraders Almanac, if you took $10,000 in 1950 and bought a basket of stock which replicated the Dow in September and sold in May every year until 2004, you would now have $486,000. But if you did the opposite and bought in May and sold in September every year, you would now have just $9,642." The latest edition of Technical Analyst magazine contains a piece by a Dutch academic called Ronald Doeswijk, who also works for Rabobank.
He explores the Sell in May strategy and says: "The adage is one of the most profitable and simple investment rules of thumb available to investors. It is profitable, because, on average, stock prices rise during the winter. During the summer, stocks perform, at best, only as well as a savings account."
Doeswijk has looked at all the major world markets over the last 34 years. The chart summarises his findings. During that period, total returns including dividends for the FTSE 100 between November and April averaged 11pc, whereas returns between April and November were just about minus 2pc. Only Denmark, Switzerland and Norway have averaged positive returns during the summer months. Doeswijk says there are figures for some UK stocks, notably government securities and famous shares like the South Sea Company, which go back as far as 1694. These figures also seem to suggest that Sell in May applied 300 years ago, at the dawn of modern capitalism. The South Sea Bubble burst during the summer of 1720.
At Barclays Capital, the strategy team have index data only as far back as 1964. They show that the average return from buying the London index at the beginning of October and selling at the end of May is just over 7pc, but the average return from buying at the end of May and selling at the beginning of October is minus 2pc. Of course, there are some striking exceptions. Between May and October 1980 the FTSE 100 surged 26pc after Sir Geoffrey Howe ended exchange controls. The last bear market ended in March 2003, after the fall of Baghdad.
Indeed, there is some evidence that the Sell in May effect has diminished in recent years. Between 1990 and 2004, the FTSE 100 rose over the summer on eight occasions, fell five times, and was broadly unchanged twice. As for the worst and best months in the market, Doeswijk says the worst is September, where the average return in Europe over the last 34 years is minus 1.5pc, and the best is December, with plus 2pc. The long-run data is compelling, but finding a scientific explanation for the Sell in May strategy is hard. Two American academics, Sven Bouman and Ben Jacobsen, found that the holiday theory cited by veterans like Mr Eaton held water in 36 of the 37 countries they covered. They built on earlier work which found Wall Street tended to outperform on sunny days (yes, really).
The vacation theory has since been shot down by others who point out that, firstly, underperformance between May and September occurs just as much in southern hemisphere countries like Australia, even though they take their holidays at different times of the year. Secondly, such a predictable cause should provide arbitrage opportunities for those who stay in the market, which would eradicate the difference over time. These days, a host of research explains the market cycle by the onset of "Seasonal Affective Disorder", or mild depression among investors caused by the arrival of winter in the northern hemisphere, where most of the world's money is still managed.
Doeswijk has modified the SAD syndrome and says there is an "optimism cycle" in markets. According to his research, stock market analysts are more likely to upgrade their forecasts for companies in December and the new year, encouraging investors to pile into the market. "Towards year end, investors start to look towards the new year, often with overly optimistic expectations. From June onwards, analysts become increasingly pessimistic about the earnings perspective," he says.
Looking at the MSCI index of global stocks, earnings growth rates for companies tend to be revised upwards in December, February, March, April and May. In other months, they are on average revised downwards. Richard Batty, global strategist at Standard Life, is cautious about following a seasonal trading strategy, not least because of the cost of trading. He concedes company profits tend to be upgraded in the fourth quarter: "This is a period when economic output accelerates, both in terms of consumer spending in the run-up to Christmas, but also as companies place major orders and ensure budgets are met." This year, it is a case of do not be so SAD and glum, there's sure to be far worse to come. The market's May blues are being exacerbated by the fear that the world economy is suddenly slowing, with the British economy particularly badly affected. Graham Secker, of Morgan Stanley, says: "There is clearly an economic cycle which follows the political cycle. The British economy has been growing ahead of trend because of Government overspending and consumer undersaving. But both of those factors are turning round.
"The Treasury is predicting that tax revenues will grow faster than the economy, but that is unlikely. "The public finances will deteriorate further and any consumer slowdown could be made worse by tax rises after the election."
There is, it seems, nothing new under the sun. Isn't it time to book a summer holiday?
