The market cliché of selling in May and not returning until St Leger's Day in early September dates from the days when market activity dropped off sharply in the summer. As investment advice, it has a patchy track record: this year it has worked well, but last year saw some of the strongest summertime gains in the past 20 years.
What is more statistically sustainable, however, is the theory that investors become more defensive in the summer, locking in any early-year profits and rotating institutional portfolios into more defensive and less volatile areas. Risk is then put back on when investors return after the summer holidays.
So it is perhaps not surprising that the summertime often brings forth the gloomiest forecasts from the dismal scientists, and this year seems to have been no exception. Articles have suggested that anything that can go wrong will go wrong - the Murphy's Law of economic forecasting. They may be right, but my general rule of thumb is to look at what these people are trying to sell to check for any vested interest.
Bond salesmen always forecast no growth so that there is no inflation, meaning that bonds are attractive and, most importantly, the hated equities are not. Gold bugs, meanwhile, tend to forecast stagflation (no growth but inflation) since that way you not only don't buy equities, but neither do you buy bonds. You buy gold. Funny that.
Stock-picking fund managers usually treat these pronouncements with a big pinch of salt, though they are aware of the power of asset allocators, many of whom love this stuff - and don't directly fight the trend. The information they get from companies is far more important and it is this, I suspect, that tends to make them more pro-active in the fourth quarter of the year.
Watching the markets last week, we had hints that the fourth-quarter bets were already being put on. The very low producer price index numbers that appeared to trigger the rally may be questionable, but not as questionable as the disaster scenarios being painted over the summer. US value investors have bought into consumer goods, technology and global growth stories, all of which were then sold off as risk aversion and disaster stories appeared over the past few weeks. Some of these will just represent a bounce, but the real story of the rest of this year is bottom up.
We are in what I refer to as the second leg of the equity bull market; the first leg, the rally from 2003, was driven by a sharp bounce in profits across the board. In simple terms companies were able to increase output from the 2002 lows without employing more people or building more factories. A growth in sales of 5 per cent produced a growth in profits of 35 per cent.
This phase is largely over: most companies are running at 80 to 90 per cent capacity and need to employ more people. Profits can still grow, but not so fast. It also means that different winners and losers appear.
The 10 biggest oil companies are investing an estimated $130bn (£69bn) in the industry, which limits their profits growth but is great news for oil service companies, pipeline manufacturers and builders of oil tankers.
At the same time, the companies selling the steel to build the ships are not winning, as you might assume. For them, prices are falling as China becomes a net exporter of steel. And this is key: making profits in this next phase of the economic and investment cycle requires a focus on supply as well as demand.
Mark Tinker is a director of Execution Stockbrokers. Mark.Tinker@Executionlimited.comReuse content