By Giles Coghlan, Chief Market Officer, HYCM
The phrase ‘sell in May and go away’ implies that equities perform better in the winter months than in the summer. Indeed, both experienced investors and those who are relatively new to the world of trading are probably familiar with this old market wisdom.
The expected or previous dips and gains at these times can frequently predict stock market performance changes, creating what investors refer to as a “market truism”. Ignoring them could be a mistake.
In the current economic climate, things may be less predictable. So does the phrase ‘sell in May and go away’ still stand up to scrutiny? In short, yes. Certainly, there are fewer active traders in the summer months which could create a lull in the markets, while winter brings with it an influx of capital for stocks as investors and businesses’ tax years come to their conclusion, but what statistical evidence is there?
Stock performance in winter vs summer
The S&P 500’s performance between 31 October and 30 April provides rather conclusive proof of a seasonal trend. In fact, holding the S&P 500 throughout this time would have resulted in an average return of +4.85% if an investor had done so every year for the previous 71 years. Additionally, the win percentage for S&P 500 investments throughout the colder months would be 70.83%.
Elsewhere, the DAX also fares well, with annual returns of +14.25% and a maximum profit of +36.81% between October 31 and April 1 for the previous 35 years. Likewise, the EuroStoxx 50 has experienced an average return of +4.34% during the same time period, providing annualised returns of +0.73% and a winning trade percentage of 71.43% – this presents yet more evidence of a wintertime surge.
The returns in a comparative summer period, though, are a little less striking. For instance, the S&P 500 has only experienced average returns of +1.17% between the first of May and the last day of October during the past 71 years, and only 64.79% of trades have been profitable.
Ultimately, such evidence implies that the market truism “sell in May and go away” does hold weight.
Assessing the theory in the current economic climate
Nevertheless, as the past few months have shown, 2022 has been a tumultuous year for the stock markets as they deal with a war in Europe, raging inflation, political uncertainty in the UK, and the possibility of an impending recession. The FTSE 100 is currently trading at about 6,980, representing an 8% decline since the year 2022 began. Simultaneously, economic unrest has been compounded by central bank rate hike cycles, which together have created a significant amount of ambiguity for investors.
It’s impossible, therefore, to predict whether market truisms will continue this winter with any certainty. Therefore, which aspects of the current economic climate could counteract the ‘sell in May and go away’ school of thinking?
The Russia-Ukraine conflict & rising interest rates
The crisis in Ukraine, which has affected international supply chains and energy markets, is a clear first aspect of the current climate that could weigh on stocks. As a result of the war, inflation in the UK has flown beyond 10%, and despite direct government action, gas and electricity costs have increased by 141% and 65%. Consequently, many businesses have been compelled to raise their prices or reduce their profit margins, which has impacted the value of their shares (for example, Tesco’s shares have decreased by 28% in 2022). As a consequence, stock markets could also see difficulties this winter, particularly if the war intensifies and puts greater pressure on energy costs.
Numerous central banks have been obliged to intervene and hike interest rates as a result of the conflict in Ukraine and the subsequent economic unrest. Of course, hiking interest rates is one of the ways in which central banks can tackle inflation, but they also limit growth, which can weigh heavily on global stock markets. In particular, investors are concerned that BoE action is pushing the UK towards the precipice of a recession, which could curb investor confidence this winter. At the time of writing, the FTSE250 has already declined by more than 25% this year. In contrast, despite the disruption of the pandemic, the FTSE250 only fell by 6.16% in 2020 and actually increased by 10.6% in 2021.
Consumer spending power and confidence in decline
Additionally, consumer confidence and purchasing power have declined, so consumers are becoming more careful in the ways in which they spend their money. Consumer spending power was really down 10.7% month over month in August, and consumer confidence dropped to its lowest level since 1974 in September, according to studies conducted earlier this year. Such declines in consumer confidence and spending power could have a detrimental impact on the share prices of businesses in the hospitality and retail sectors in particular as their sales fall, especially in the run-up to Christmas when consumers tend to spend more of their money.
Reasons to be optimistic
The above offers a pretty gloomy forecast for the performance of the stock markets during the upcoming winter. However, there should be some hope for the medium term due to the possibility of a ‘January spike’.
In the past, stock markets have performed well in January because traders and investors frequently have new money to invest. As a result, share values frequently increase, particularly for small-cap businesses. This should provide some optimism to investors.
Moreover, the money supply figures suggest that the Fed has almost won its battle with inflation. As such, investors should be encouraged by the opportunities that a slowdown in the Fed’s hiking cycle could create in the UK’s stock markets.
Indeed, the FTSE 100 is currently trading at about 8.7 times the price/earnings ratio (below the lowest points in 2008 and 2011) and two standard deviations below its 10-year average. That said, with valuations trading the FTSE 100 at a discount of around 20% when compared with European stocks, investors could cash in while UK stocks are struggling. Certainly, if the risks that have been weighing on stocks – central bank action, the cost-of-living and rising energy costs – begin to subside, the cheap valuations of some UK stocks will become increasingly attractive.
It’s difficult to forecast how the markets will move given the level of ambiguity and volatility in the global economy. That said, investors should remember that seasonal trends exist for a reason – ignore them at your peril. As such, investors must weigh up all the variables that could affect their stock market investments and make choices that best suit their individual portfolios.
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Giles Coghlan is Chief Market Analyst, HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA. HYCM is a global brand name of the HYCM Capital Markets Group. The Group via its relevant subsidiaries has representations in Hong Kong, United Kingdom, Dubai, and Cyprus.
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