The St Leger at Doncaster is the oldest classic horse race in the world and was held yesterday. So how did that old investment adage work out this year: sell in May and leave, come back on Saint Léger’s Day?
Well, if you juggle the timing a little, it’s not that bad in the UK, but terribly bad in the US.
This illustrates two summer investment phenomena: the extraordinary resilience of the US market despite being written off by many professional investors earlier this year; and the rather dismal performance of the stock here.
What’s next?
A recent strong rise has returned the FTSE 100 to where it was in May: So what comes next?
> Stock market data: FTSE 100, 250, All Share and company share price charts
Step back a moment. The idea that there is a seasonal lull in stock prices during the summer is long established and there is some data to support it.
April has been a pretty strong month over the past 40 years, according to UK market research. May and June have been weak. But July has been generally good, while August and September have been disappointing.
This year the best time to sell was mid-April, when the FTSE 100 was above 7,900, and as happens when I wrote about the “sell in May” saying.
But the time to buy back would have been late August, when the index was languishing below 7,300, rather than waiting until September.
In fact, in mid-May the Footsie was between 7,700 and 7,800, pretty much where it is now. So it was a useful guide, but not brilliant.
Moving forward: US stocks have been the big story of the year and that could continue
But if you had heeded the “sell in May” message when it came to US stocks, you would have missed out on a booming market.
The S&P500 is up about 10 percent in May and 18 percent so far this year. The Nasdaq index of high-tech stocks is up about 20 percent in May and 34 percent at the start of the year.
That was not what most American stock strategists expected in April. One of them made a valiant effort and predicted that the S&P500 would fall 22 percent this year.
Clearly there is still a lot of money in America looking for a place to go.
Clearly there is still a lot of money in the United States.
In fact, the strong performance of shares in Arm, our Cambridge-based chip designer, following its IPO last week in New York is a sign of this. Fomo (fear of missing out) is back.
What’s next for stock markets?
What about the future? Starting with the US markets, pessimists, and there are still some, believe that earnings will be hit hard by the next slowdown and that will eliminate the justification for the current skyrocketing stock values.
Optimists believe that any slowdown will be mild and that, in any case, the markets are mature enough to look ahead to further growth. That tension will continue, but both would recognize that the world must be near the peak of this interest cycle.
Last week, the European Central Bank raised rates but appeared to signal that the peak was within sight. The Federal Reserve is expected to pause its rate hikes this week and there is a chance the Bank of England will do the same.
So, when it comes to the United States, the prevailing view is that while stocks are expensive by historical standards, those fears of a fall in stock prices this fall have subsided.
UK stock market remains cheap
Here it is different for two reasons. First of all, we don’t have large-cap high-tech companies like the United States. The only serious contender we used to cite in London was Arm, bought by Masayoshi Son’s SoftBank in 2016 for £26bn, which is now listed in New York at a value of around £56bn.
Secondly, London offers investors a different proposition: strong companies in more traditional businesses that produce decent dividends.
Shares are cheap both by historical standards and relative to US markets.
The Footsie has a P/E ratio of 11. That compares to the S&P 500 at 20 and the Nasdaq at over 30 (and a historic rating over the decade of 16).
London shares are even cheap compared to those listed in Frankfurt, despite the weak performance of the German economy. The DAX index has a price/earnings ratio of 13.
This persistent undervaluation of the London market is infuriating and in this article we have looked at the reasons for this, including the fact that, for regulatory reasons, UK institutions do not invest in UK companies.
It’s crazy, and the best thing that can be said is that at least the problem is now recognized.
But undervaluation will always be corrected. It always is, even if it takes an extraordinarily long time. So if you sold in May, maybe now isn’t a bad time to get back in.
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