The Title phrase above, sometimes heard in investment circles, is derived from the historically weak equity returns experienced in the months from May to September on Wall Street. The chart alongside graphically shows how this trend has manipulated itself over the past 30 years in the S&P500.
What the phrase alludes to is that you should sell your equities in May and buy them again in September to maximise annual returns from the equity market.
While we hope that investors are unlikely to make investment decisions based on a catch phrase, any seasonal data can easily be manipulated to suit your bias and the next chart shows how the same equity returns in USA election years paints a completely different picture…and earns a caveat for the catch phrase above of “except in an election year…”
For this reason, we have always looked at seasonal data as interesting eye candy and nothing more and try to cut out the “unnecessary noise”.
We also believe that very few of us mere mortals have the skill to consistently and positively time markets and therefore prefer to stick to the adage of “time in the market” to achieve realistic returns.
Source: Bianco Research
Sticking to good investment principles and following a plan are indeed fundamentals to achieving your expectations from your investments. However, there certainly have been plenty of “curve balls” thrown at us recently to challenge the above: Greece and the Euro-zone, global debt levels, volatile currencies and “Presidential Spears” to name a few. Remaining focused will be very difficult going forward!
Looking at a few global indices performances for the year from 1 January 2012 to 31 May 2012 in the chart on the left, after some good equity returns since the beginning of the year, most of these gains were lost in the month of May, so unless you sold on the 1st of May, you would have got your market timing wrong this year and missed selling out at the peak. But, this is an election year in the USA, so who knows where to from here…..
In this year so far – the catch phrase is not holding true as you should have “sold in April” to have sold out at the highest point.
What we do know is that the volatility in local and global markets predicted last year by many industry experts has certainly been prevalent and until global economic recovery takes traction, we can expect to see a lot more volatility – certainly in the short to medium term. A lot of important global economic data was released during May – very little of which was positive – causing markets to react negatively worldwide and creating the picture you see in the chart above. Other things you can bet on are that Greece will rear its ugly head again – Spain and Italy will probably also. Will the new German / French relationship bring some calm to the Euro-zone?
There is something else that many may have missed. On the 5th of June, one of the rarest celestial events visible from Earth occurred. The event is the traverse of planet Venus across the face of the sun. You could have blamed it on just being too busy or you just weren’t interested. Well, even if you had wanted to, you most likely would not have been able to see it as South Africa fell into a zone from which the event was not visible. It won’t happen again until the year 2117, so most probably no-one alive today will ever see this again! So, why the astronomy reference? It was just us thinking about the ASTRONOMICAL amounts of debt that various countries have built up. Not forgetting the ASTRONOMICAL amounts of wealth destroyed since the “Great Recession” started in 2008. But more importantly, we also pondered the fact that celestial objects tend to behave in a predictable manner. Quite unlike markets. Or politicians.
We did mention last year around this time that Greece and its debt to other European countries was casting a massive negative shadow over the Euro-zone – simply because many feared a run on European banks – which none would survive because incestuous European lending activities had driven debt levels uncontrollably high AND which could spark another GLOBAL financial crisis. A year later and there is still no firm solution in place as politicians in Europe still try to find a solution palatable to voters and creditors alike. With global debt levels expected to reach US$47 trillion this year (yes, that’s 47 with twelve zeros behind it!), the prospects of global economic growth recovery still look very weak in the short and medium term.
It’s a “long and winding road” ahead of the global economy and we expect the current volatility to continue for a while yet – and we expect a lot of volatility from our very own Rand too. Returns from all asset classes (equities, property, bonds and cash) are expected to be muted, so we should all be tempering our expectations of investment returns, diversifying our portfolios, hedging against inflation and “holding onto our hats” as we all experience this unknown ride….
Kind regards
Rowan Allpass – May 2012.