Selling in May: The end of the beginning?
Take forecasts beyond Q2 with a pinch of salt
Investors will be familiar with the old adage "sell in May, go away, come back on St Leger's Day", which originated from a time when financiers would escape to the country during the hotter months and return in time for the end of the race.
While trading can slow down during the summer, this has widely been debunked as a myth or an old wives' tale by numerous investment professionals over the years.
And as we enter May, it seems as though this goes beyond an old wives' tale and becomes a high-risk strategy for investors to undertake, given the extreme price swings we have seen recently.
Had an investor decided to sell their investments at the end of Q1 this year for instance, the chances are they would have cashed in a loss, given that all major equity indices fell double-digits in Q1 this year.
But despite the fact most of the world remains in lockdown and the pandemic rages on, stockmarkets over the past month tell a completely different story.
Since the start of April to time of writing (29 April), all major stockmarkets have bounced, with the previously best performing index the MSCI AC Asia Pacific ex Japan now bringing up the rear with gains of 8.6% and the S&P 500 index powering ahead with a total return of 15.9% according to data from FE fundinfo.
Olivier Marciot, investment manager and senior vice president in the cross-asset solutions team at Unigestion, said it is only a small handful of sectors - namely mega-cap tech and defensive healthcare stocks - that have fuelled the rally.
"Breadth, measured by the percentage difference between index and median stock distance to highs is extreme, indicating a very concentrated number of stocks are thriving," he warned.
"This has historically been a leading indicator of large drawdowns, and it questions the strength of the current 'rally'."
He pointed out that analysts are pricing in a 20% earnings contraction for 2020 and, according to his calculations, current market levels are discounting 0% earnings growth over the course of the year.
David Riley, chief investment strategist at BlueBay AM, agreed the recent equity market rally suggests investors are anticipating a "relatively strong rebound in corporate earnings growth and the economy".
"Our assessment is there will be an initial bounce in Q3 as lockdowns are relaxed, but thereafter the recovery will flatten - a sort of tick-shaped recovery," he explained.
"But all predictions should be taken with a barrel, not pinch, of salt."
Adrian Lowcock, head of personal investing at Willis Owen, said volatility will remain on the cards across stockmarkets throughout the rest of the year.
"Sell in May has triumphed on occasion as investors focus on the important things in life, such as holidays, in the summer months. However, as an investment strategy, it is far from failsafe," he said.
He added: "We are at the end of the beginning, not the beginning of the end. Life after lockdown will bring some psychological relief, but when professional investors start focusing on fundamentals and more data comes through, it will be some time until the situation returns to anything like normality."
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