Should you ‘sell in May and go away’ amid the coronavirus crisis?
The health pandemic has caused stock markets around the globe to tumble and UK equities are down 29% in capital terms since the start of the year.
With the prospect of markets getting worse over the summer months because of usual seasonal trends, investors are rightly concerned.
The ‘sell in May and go away’ adage isn’t lined to market crashes. It dates from the time that stockbrokers would typically leave their desks to enjoy the summer ‘season’ – Royal Ascot, Wimbledon, Henley Royal Regatta, Cowes Week, ending with the St. Leger flat race in Doncaster in mid-September.
As such, nothing much happens over the summer months, so investors can reasonably sell their holdings and buy them back later.
But with sporting events and large social gatherings now cancelled for the foreseeable future, 2020 is not your typical year.
Online investment service for fund and share dealing, Bestinvest, analysed forty years of monthly data from the UK stock market (as measured by the MSCI United Kingdom Index).
On average, UK share price returns have been negative in May and June over the last four decades, dipping respectively by 0.24% and 0.40%, though overall it is September that stands out as the month that has fared worst with an average monthly decline of 1%.
When dividends – the cash pay-outs that companies choose to make to shareholders are factored in – the picture looks less gloomy for the summer months. On a total return basis, including dividends, average returns in May are positive overall but low (0.13%).
Of course “average” returns can be distorted by notable years and so Bestinvest also tested the regularity of when each month has seen share prices fall rather than gains.
On a capital return basis, May and June do stand-out as the two months where share prices have fallen more often than risen, respectively 52% of the time in May and 58% of the time in June. Once again, when dividends are included, the picture changes for May.
While there have been some really turbulent summers in the past for the stock market, the number of times when the stock market has posted a double-digit loss for investors during May-August period have been more than matched by sizzling summers when shares surged 10% or more over these months.
‘Selling up now when markets have already fallen could result in crystallising losses’
Jason Hollands, managing director of Bestinvest, said while there is some evidence to support the general idea of market seasonality, every year is different, and returns can vary wildly.
He said: “This year certainly isn’t shaping up to be a ‘normal’ year for the markets, so there is certainly no reason to expect markets to conform to any general patterns of seasonality.
“As the data suggests, the receipt of dividends in the summer is usually one good reason to remain invested, though this year a large number of companies – including all the major banks – have scrapped dividends altogether due to the uncertain outlook.
“Trying to predict whether markets might rise or fall over the next few months is just guess work. Selling up now when markets have already fallen so sharply since the start of the year, could simply result in crystallising losses. It is therefore far more sensible to focus on a reasonable time horizon.”
Hollands added that while the economic outlook is “gloomy”, a lot of bad news has been priced into stock markets.
“Importantly, the level of stimulus packages announced by central banks and governments over the last several weeks is unprecedented, far outstripping what we saw during the global financial crisis.
“With so much new cash created to support the economy and the financial system, this strongly supports the case for investing in stock markets on a medium to longer-term view. With business models being tested to the limits, it is vital to focus on high quality companies that can withstand the challenging environment of 2020 and thrive again when the pandemic abates and the economy starts to recover,” he said.