Should you ‘Sell in May’ and go away?

25 April 2018
 

With the start of May just round the corner it is that time of year when seasoned investors will recall the adage ‘Sell in May and go away, don’t come back till St. Leger Day’. The saying is believed to hail from a time when the City resembled a Victorian gentlemen’s club and stockbrokers would leave the City for ‘The Season’, a period of sporting and social events including Royal Ascot, Wimbledon, the Henley Royal Regatta, Cowes Week and ending with the St Leger flat race in Doncaster in mid-September. Over time it has evolved to become associated with a belief that the summer months are a dangerous period for investors, with a high incidence of market sell-offs. Adherents of the theory advocate selling out of the stock market for the summer, to return and buy back into the market again in the autumn.

After a healthy total return of 13.1% in 2017, the FTSE All Share Index of UK shares has got off to a tougher start in 2018 with a return of -3.42% since the start of year. Is now the time for fans of the seasonal investing approach to cash in their portfolios until St. Leger Day or could they find themselves caught in the starting gates or backing the wrong horse?

Bestinvest, the online investment platform for fund and share dealing, has put the theory to the test looking at 32 years of data for the FTSE All Share Index, which includes the shares of around 640 London Stock Exchange listed companies, since the ‘Big Bang’ reforms of 1986. This massive shake-up saw the deregulation and opening up of the City including the introduction of electronic trading. Bestinvest’s research shows that share prices as measured by the capital return on the FTSE All Share Index have declined and risen an equal amount of times (16 each) during the period between May to mid-September over the last 32-years suggesting no firm conclusions for the theory either way. However, once dividend payments are factored in and returns are measured on a total return basis, UK stock market returns have been positive 66% of the time during the summer. This compares to markets generating positive returns 78% of the time across the full calendar years in question. There have however been very significant variations in returns during the Summer. Firm believers in the Sell in May theory can point to seven brutal summer sell-offs since Big Bang when the capital returns on UK shares posted double-digit declines: 1992 (-13.4%), 1998 (-13.4%), 2001 (-19.2%), 2002 (-22.1%), 2008 (-13.0%), 2011 (-12.3%) and more recently in 2015 (-10.3%). However selective memory might mean they ignore the six soaring summers of 1987 (+12.2%), 1989 (+10.1%), 1995 (+11.1%), 2003 (+12.7%), 2005 (+12.7%) and 2009 (+19.3%) when the markets posted sizzling hot gains.

Jason Hollands, Managing Director at Bestinvest, said:  “Although share trading volumes are typically lower in the summer months as the company reporting season comes to an end, these days financial markets trade all year round. The nature of the players in the market has also changed radically from the days of bowler hatted gents. The big players generating trading activity now include computer-model driven ‘quant’ investment funds and hedge funds, which never go to sleep. And these days when a City professional is off on a summer holiday, they’re almost sure to be forever checking news from the markets on a mobile phone or tablet, as the boundaries between working hours and personal time have eroded. 

“While market returns in the summer months can be unpredictable, systematically exiting the market during this period does not convincingly stack up as a strategy in the modern age. Pursuing such an approach could also clock up transaction costs and capital gains tax liabilities, which are not factored into our research. “A key reason to remain invested throughout the year is that the summer months are typically when companies pay their final dividends. Investors contemplating exiting the market for the summer should take particular care to be aware of the ‘record date’ at which they must still hold their shares in order to be entitled to receive any final dividends for the year. Where dividends are reinvested during the summer months, including those periods where share prices have fallen, this has a powerful compounding effect on overall returns.

“Unless you have a magic crystal ball to see into the future, trying to accurately predict short-term market movements, including so-called ‘corrections’, is a mug’s game. Big market moves are invariably triggered by surprise news shocks and are not something that can be conveniently scheduled into a calendar alongside the Chelsea Flower Show or Wimbledon. It is therefore better for investors to stay focused on their long-term strategy rather than get blown off course by speculating about what markets might throw up over the short-term.

“While it is impossible to know for sure what the summer of 2018 will bring for investors, the starting point is that current UK shares look reasonable value compared to both other developed markets and also longer-term trend. This is undoubtedly down to political uncertainties weighing on sentiment and a lot of anxiety seems priced in.

“The UK economy has however proved a lot more resilient than many economists predicted a year ago and with inflation now receding this should ease the headwinds faced by consumers in recent times. If progress can be made towards a post-Brexit free trade agreement with the EU, this should help the clouds of worry lift and potentially support a mild rerating of UK shares, many of which are after all international businesses that earn revenues from across the globe and should not be perceived as proxies for the UK domestic economy.”

 ENDS

 

 

FTSE-All Share Index performance May to Mid-September

Year

Capital Return

Total Return

 

Year

Capital Return

Total Return

1986

-0.4%

1.4%

 

2002

-22.1%

-21.2%

1987

12.2%

13.8%

 

2003

12.7%

14.2%

1988

-1.2%

0.4%

 

2004

1.1%

2.5%

1989

10.1%

12.0%

 

2005

12.7%

14.3%

1990

-3.0%

-1.1%

 

2006

-2.3%

-0.9%

1991

4.8%

6.6%

 

2007

-3.1%

-1.8%

1992

-13.0%

-11.6%

 

2008

-14.3%

-13.0%

1993

7.2%

8.6%

 

2009

19.3%

21.3%

1994

-1.3%

0.1%

 

2010

0.2%

1.6%

1995

11.1%

12.7%

 

2011

-12.3%

-10.9%

1996

2.5%

4.2%

 

2012

2.3%

4.0%

1997

8.1%

9.3%

 

2013

3.1%

4.7%

1998

-13.4%

-12.6%

 

2014

-0.3%

1.3%

1999

-5.5%

-4.7%

 

2015

-10.3%

-9.6%

2000

3.3%

4.2%

 

2016

7.4%

9.2%

2001

-19.2%

-18.4%

 

2017

0.0%

1.7%

Source: Tilney / Datastream. All dates from 1 Jan to 31 Dec. Total return includes dividends reinvested.

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