Where to from here- Sell in May and go away?

Steve Thaxter- Partner and Principal Adviser
Sovereign Wealth Partners

 

There’s a somewhat worn out saying in finance that one ought to sell in May and go away.  May is the month that’s historically delivered the lowest returns in global markets.

In fact, the average return in May has been slightly negative for each of the Australian, US and UK share markets for generations, according to recent research by Sean Turnell and Alexander Ineichen.

 

April tends to be strong, but May and June tend to be weak.

 

All very interesting but let us not get ahead of ourselves. Every year is different and anyone pushing a firm prediction of short-term market outcomes is either a con-artist or deluding themselves.

 

The stock market’s most favourable six-month period (November- April) is coming to an end, without much to show for it. 2020 has not been your average year.  Not by a long shot.

 

As the Coronavirus panic hit, most countries around world experienced a fall of about 35% in their share markets, peak to trough, from mid-February to mid-March.  Then, as huge co-ordinated and unprecedented monetary and fiscal stimulus programs were launched around the world, the markets started to recover.

 

As the red lines in the chart below show, globally we’ve recouped around half of the market losses.  However, Australia’s recovery has lagged somewhat, particularly the US. Superficially, Australia’s position seems surprising given how well placed it is in terms current infection numbers.

 

Source – Perpetual 11 May 2020

 

So where to from here?  Is this a V shaped recovery, or L shaped, U shaped, W shaped or pear shaped?

 

Given the sheer impact of COVID-19 across the globe, we have not seen anything on this scale before. The answer is simple- no one really knows.

 

Our concern has been that the cause of the April rally was nothing to do with the economy and the level of profits earned by companies going forward, it was simply that:

 

  1. Financial markets were impressed and relieved by the monetary and fiscal stimulus unleashed, which was several orders of magnitude larger than the GFC response, and
  2. Virus growth curves started to flatten in the US and Europe.
  3. Investor psychology- “FOMO” or fear of missing out.

 

Even though markets have been rising since late March, the extent of the disruption and slowdown in global economic activity, along with the loss of earnings, dividends, jobs and incomes is still largely unknown.  Balance sheets must be repaired and, eventually, debt has to be repaid.  Day to day the economic estimates we observe are still deteriorating and, based on real world activity and sentiment, we feel we must be prepared for an extended recessionary outcome with an investment outcome that could look more like a “W” than a “V”.

 

For our ongoing investment advisory clients these and other investment positioning topics are explored in our regular “Window to the world” email series.  This communication draws upon a huge library of research and expert opinion for observations and insights that we feel are most relevant to the day to day advice we give.

 

Contact your Sovereign contact if you’d like more information.

 

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