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Weekly Comment icon - Week 19, 2016It is that time of the year again! As the calendar flips to May, the global stock market enters what is historically its worst six months of the year, in which it typically underperforms the November to April time frame. This is a well-documented seasonal trend, backed by solid historical numbers. Taking the US market as an example, since 1950 the Dow Jones Industrial Average has delivered an average return of 7.5% between November to April, whilst the market has generally gone sideways from May to October, with an average increase of just 0.4%.

Without fail, the commentators, pundits and investors will seek reasons why one should sell in May and go away. We can think of a few also:

  1. ‘Brexit’ – if Britain decides to leave the European Union on 23 June.
  2. Global Liquidity normally has a lean period from the end of April annually – the Bank of Japan already made the first move last week to pause on their Quantitative Easing programme.
  3. Greece fears may be re-ignited in July, as a series of important dates in the country’s debt repayment programme fall due.
  4. Worse than expected corporate earnings growth.


Similarly, we can think of a few reasons to remain invested in the markets:

  1. Unless one is a proficient day trader, the most appropriate investment philosophy is ‘time in the market’, not ‘timing the market’ (otherwise referred to as ‘re-investment’ risk).
  2. Although global and local economic growth continues at a rather anaemic pace, retail sales remain buoyant globally and even in South Africa. This may lead to better than expected corporate earnings growth, which may lead equity markets higher.
  3. The alternative asset classes to equities (global bonds and cash, for example) are not exactly providing much excitement in terms of yield or upside potential.
  4. Last year in April/May most markets were trading at all-time highs and not one mainstream equity index is presently trading higher than last year’s peak.
  • The S&P 500 traded at a high on 21 May 2015 (in USD terms) and the FTSE JSE All Share Index on 24 April 2015 (in ZAR terms) which is still in place, but currently are close (between 1-2%) to breaking through this resistance.
  • The FTSE 100 traded at a high on 21 April 2015 (in GBP terms) and is 6.8% below that high at the time of writing.
  • The Nikkei 225 had its peak (in USD terms) on 29 April 2015 and is trading 8.9% lower than its peak currently.
  • The Euro Stoxx 50 reached a long term ‘triple top formation’ on 13 April 2015 in Euro terms. It is currently trading 16% below those highs. In USD terms, meanwhile, this index has yet to surpass the high reached in December 2007, is still currently trading more than 18% below the June 2014 post-crisis high and is 12% below a level reached on 21 May 2015.
  • The MSCI Emerging Market Index (in USD terms) also peaked as long ago as 2007, but traded within 3% off that high on 27 April 2015. It currently stands more than 18% below that post-crisis high, after having risen more than 22% since 20 January 2016.  EM equity valuations (excluding the JSE All Share Index) are also at a significant 24% discount relative to developed market index valuations, based on leading P/E ratios.
  • Just to make it more interesting, we had a look at Commodity prices too. The Bloomberg Commodity Index reached a peak in July 2008 and is presently some 64% below that level. It is fair to assume that commodity prices were trading irrationally high in 2008, so we looked back to search for a peak since the global financial crisis and this takes us to 22 April 2011. Today (at the time of writing) the index currently stands 51% below that peak, after a 16% recovery since 20 January 2016.

‘Sell in May and go away’ certainly worked in April/May 2015. Perhaps the mathematical probability of ‘this time it is different’ is tilted in favour of the EM bulls this year?

Sell in May and go away?



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