Sell in May and go away: Advice to bank on?

Reading the form: average FTSE gains have been negative in summer
AFTER global equities tumbled this summer over fears of a Chinese slow-down and in anticipation of a Fed rate hike, investors might have done well to heed the advice of one old City adage: “Sell in May and go away, don’t come back till St Leger Day.”

The saying urges investors to sell off UK equities in May, and buy them back after the St Leger race meeting in September, which takes place this weekend. The reasoning behind it is that Royal Ascot, Wimbledon and the Season’s other sporting distractions tear traders away from the City, causing volumes to slump and crimping stock prices. Hordes of City workers still make the annual pilgrimage to Wimbledon, so is there any value in the adage?

This summer, equities have themselves become a bit of a spectator sport. On 1 May, the FTSE All Share index stood at 3770.75, and reached a summer high of 3824.67 on 28 May. But the index closed yesterday at 3,350.74, with almost 9 per cent wiped off its value since May Day.

To look at averages over the last 50 years, getting out before May would have brought rewards. “In the 50 years from 1965 through 2014, the FTSE All Share Index fell nearly half the time between 1 May and 1 September,” observes John Higgins, chief markets economist at Capital Economics. The average gain during this period was minus 0.6 per cent compared with an average gain of 8.1 per cent during the rest of the year.

Summer market movements in more recent years paint a different picture. Fidelity Personal Investing has analysed the returns for the FTSE All Share between 1 May and 1 September every year since 1995. Its research shows that, for 11 of those years, share prices increased, meaning that investors would have lost money if they had sold on May Day.

Markets tend to perform worse between May and October, explains Tom Stevenson, investment director at Fidelity Worldwide Investment. “No-one really knows why this should be.”

Stevenson speculates that “over-optimistic profit forecasts” might be partly responsible. “The autumn sees investors start to look forward to the next calendar year,” he says. People also go on holiday which means thin trading and potentially more volatile markets.

Some investors fall prey to similar “seasonal” market adages such as the “January Effect”, which holds that markets will follow the trajectory of the first month of the year. These “are not good guides to future performance because they are so unpredictable,” says Stevenson, even when the data averages are compelling. Investors following seasonal market trends may also be stung by trading fees involved in wholesale migrations in and out of the market.

Indeed, the City may have moved on from when the St Leger Day saying actually had weight. “Many bankers and company executives were then on the same razzle. So very little business could be done,” opines Alastair Winter, chief economist at Daniel Stewart & Co. “It had nothing to do with trading or financial performance and everything to do with the social calendar.”

Furthermore, September and October may themselves be seen as “risky” times to buy back into the market, warns Stevenson. Big crashes have historically occurred in these months.

William Railton is business features writer at City A.M.