Do shares really suffer a summer slowdown ?

Is there anything in the old City saying that advises 'sell in May, go away, buy again on Leger Day'? James Moore finds out
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The Independent Online

Sell in May, go away, buy again on Leger Day, so the old City saying goes, referring to the running of Doncaster's Ladbrokes St Leger Stakes, Britain's oldest classic horse race. With turfistes from around Britain heading for Turf Moor to see if Frankie Dettori can land his fourth renewal in the last five years with the assistance of the Godolphin-owned favourite Kite Wood, it's worth seeing how those who followed the advice have fared this year.

The answer is not very well, because they would have missed out on a spectacular summer rise in share prices. On 1 May this year, the FTSE 100 closed at 4,243.22. Yesterday it burst through the 5,000 barrier again, having eased back on Thursday, to end the week at 5,011.47. Had you sold in May, you would have missed out on an 18 per cent rise in Britain's blue-chip stock index.

But there is a theory behind the saying. While many have dismissed it as an old wives' tale, at the beginning of the decade a couple of researchers decided to test out the theory, which is recognised in the rest of the world as "The Hallowe'en Effect", suggesting that you should buy again on 31 October rather than in the middle of September.

In an academic study looking at a range of different stock markets, Sven Bouman and Ben Jacobsen said they believed the saying had something going for it: "Surprisingly, we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample.

"The 'sell in May' effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. While we have examined a number of possible explanations, none of these appears to convincingly explain the puzzle."

However, most stock-market watchers say that the effect – if there is one – might have something to do with summer holidays. They contend that companies are reluctant to make major strategic moves when so many key executives are away, with the same holding true for fund managers and financiers. Because of this, so the theory goes, share prices are inclined to drift lower.

But research by The Independent looking at more recent times does not really back the theory up. During the 10 years prior to this one, the market did fall between 1 May and the second weekend of September (the traditional date of the race) on six occasions. However, on one of those occasions the fall amounted to barely two points and the FTSE 100 rose on four.

Robert Parkes, equity strategist at HSBC, has gone back further, looking at how the market performed between the middle of May and the middle of September over 29 years. It rose on 18 occasions, falling on just 11.

"This year is a prime example of why you shouldn't follow that advice," he says. "It is true to say that the summer months do tend to be weaker but I think it would be very dangerous to make investment decisions on a saying that says 'sell in May, go away'."

Mr Parkes says this year's spectacular summer rally has been caused by a better-than-expected results season and an improving economic outlook. He is optimistic that it will continue. "There was a sell-off going into the results season because the expectation was that it was going to be disappointing, relative to expectations. But 73 per cent of US companies actually beat analysts' expectations."

As a result, those analysts are now furiously upgrading their forecasts and driving share prices higher. "The macro picture is also supportive," Mr Parkes says. "Monetary conditions [interest rates] are still very loose and you also have M&A activity."

The effect of this can be seen in the galvanising effect of US food group Kraft's announcement of a £10.2bn takeover proposal for Cadbury had on share prices, even though the latter has furiously rejected the offer. News of the deal has given rise to hopes in the City that the good times, if not exactly back, could be just around the corner.

Justin Urquhart Stewart, a director of 7 Investment Management and a long-time market watcher, says: "Following the saying has been completely the wrong thing to do this year. It never was particularly credible and the days where everyone went away for the summer are no longer."

However, he adds: "What you do tend to see happening is that trading volumes rise quite significantly in September. What that will do is make things more volatile." So even if the markets continue to go up, it's going to be a choppy ride in the months to come.

Can the recovery continue? The experts' forecasts

Pessimistic

Justin Urquhart Stewart, 7 Investment Management

End of year FTSE 100 prediction: 4,800

"We've gone from Armageddon a year ago to deep recession six months ago, to six months later – all over. Markets have been on steroids when you should realistically have seen growth that is anaemic and insipid. Momentum might carry us a bit further but you could see dips soon."

Optimistic

Henk Potts, vice- president of Barclays Wealth

End of year FTSE 100 prediction: 5,200

"We could add to this. Interest rates are still historically low and will remain so for some time and there has been a considerable fiscal stimulus. Companies are adapting well to low demand and analysts are increasingly optimistic. You've gone to [about] 60 per cent of companies being upgraded."

Optimistic

David Buik, senior partner at BGC Partners

End of year FTSE 100 prediction: 5,250

"Look at the alternatives. If you want to keep your money on deposit you'll get about 0.5 per cent. Sensible companies in areas like oil, food and drink and drugs can provide support to the market. People see they are paying good dividends – 4 or 5 per cent. They'll buy because its worth having that."

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