It’s that time of the year again when stock market lore advises investors to get out of the market and go on holiday for six months.
It’s that time of the year again when stock market lore advises investors to get out of the market and, effectively, go on holiday for six months. Indeed, ‘sell in May’ has been good advice over certain periods. Since 1970, for example, the average return in May for the FTSE All-Share index has been -0.4 per cent, making it one of only three months to produce a negative return – the other two being June and September.
However, in recent years equities have performed somewhat better in May. Since 2000 the May market has seen more positive returns than negative ones. Moreover, as can be seen in the accompanying chart, over the past five years the market has been up every May. In 2017 the FTSE All-Share index racked up a not insignificant return of 3.9 per cent over the month.
So why does May have a bad reputation with investors, and why is the advice to sell in May so persuasive? One reason can be gleaned from the chart. Although the proportion of positive and negative month returns in May are roughly equal, the positive returns in May are relatively low, whereas market falls can be substantial. In May 2012 the FTSE All-Share fell by 7.5 per cent, the largest fall in the index in any month over the past six years.
On average in May the market trades fairly flat for the first two weeks. Prices then drift lower in the second two weeks.
The two-day Federal Open Market Committee meeting starts on 1 May, the US non-farm payroll report is published on 4th, May Day bank holiday is on 7th (the LSE is closed) and an MPC interest rate announcement is due on 10th. Spring bank holiday is on 28 May (the LSE and NYSE are closed) and the quarter ends on 30 May.
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