“Sell in May and go away”… was a maxim of old and like most proverbs had come about from historical experience. From the 1950s through the noughties, it was often the case that the markets (both in Europe and the US) made very little progress through the summer and that the period from November to April had, on average, significantly stronger stock market growth. Various explanations were ascribed to this, but such analysis has become less interesting as the correlation has broken up over the last decade or so. What we can probably say is that the Global Financial Crisis, digitalisation and globalisation has thrown all the old rules to the winds.
So could “Selling in May” be making a nostalgic reappearance as some have suggested? Whilst Covid remains a global problem, the shock of Covid-19 has now passed. We have already seen the resultant rally in all the capital markets: at first into the Covid “beneficiaries”, and over the last two quarters the recovery has rotated into the cyclical and value segments previously left behind. So what next? Corporate earnings have kicked back in, as has economic growth, albeit from extraordinary lows.
The concerns now hinge not around recovery, but around the inflation that it may bring. So we now find ourselves waiting. Waiting to see if the economic recovery continues, and at what pace and with what inflation. We also wait to see if earnings growth recurs (rather than bounces back from all-time lows) and if some parts of the economy overheat and some never recover. It is all to be discovered.
Valuations may look toppy, but then the Capital Markets have never had so much cash injected into them for such a sustained period of time, so this should not be so surprising. For certain the developed nations’ Central Banks are not going to let everything slide now, having got this far. That said, if the tap is gradually turned off we will have to rely on earnings growth to move forwards. It feels like that growth is already built into the forecasts, and into the valuations, so all we can do is patiently await delivery.
Markets’ practitioners are generally not very patient. In the absence of any strong directional momentum, every piece of data is now to be anticipated and analysed for every nuance in granular detail. It will keep the commentators and analysts very busy, and create little tea-cup sized storms, but it is unlikely any of this will unhinge the markets’ stately progress through the summer until we get to the next earnings round.
So should we actually have sold in May? I do not believe so. In practice there are frictional costs in transacting, there are usually tax implications too, and in all probability the markets will be a bit higher by the autumn. (As always, we must caveat “shocks”, which by their nature are unpredictable.)
What we should do is ignore the commentary “noise” and focus on the big multi-year trends and our current stock selection because there will always be winners and losers.