6th May 2014 by Edmund Shing
I find that I am greatly tiring of the plethora of articles which arrive around this time of year, urging investors to “sell in May and go away – come back on St Leger’s day”. Every year following May Day it is the same story but I believe the record needs to be set straight…
As Figure 1 illustrates, the FTSE-100 index has typically posted its strongest seasonal performance over the six months from the beginning of November to the end of April the following year, judging from average monthly returns since 1986. December returns (including dividends) have averaged 2.6%, while April has been the second-best month at 2.1%.
Judging from this 29-year history for the FTSE-100, May comes in as the ninth-best month for stockmarket returns, with a 0.3% – not all that impressive but nevertheless a positive average return.
Figure 2 shows the average monthly returns since 1990 for the MSCI Emerging Markets index, the main benchmark index used for investing in this geographic segment.
In the case of emerging markets, the average return has been zero for the month of May, typically following a strong April, which has typically been the second-best month for emerging market gains.
If we look at the table in Figure 3, which shows monthly returns for the thee UK FTSE stock indices by size, we can see the real danger period for stocks historically has really been June to October, with negative returns registered on average over two to three of these months.
Below, as illustrated in figure four it is clear that May is actually on average a month where UK stocks go up, with better performance from stocks in the FTSE Mid 250 and SmallCap indices.
Check out Figure 5 in this chart. I have compared the results of holding the FTSE SmallCap index all the time (dividends included and reinvested) from the beginning of 1986 with two seasonal strategies: the first is holding SmallCap stocks just over the classic November-April half-year period each year (and sticking the money under the mattress for the other six months), while the second holds SmallCap stocks over the December-May six-month span each year.
Holding UK SmallCaps over just December to May of each year since 1986 would have resulted in an average yearly return including dividends of 12%, compared with just 10.6% if you had held SmallCaps over November to April each year and only 8.3% if you had held SmallCaps the entire time. Compounded up over the 28 years, this results in a 43% higher total return.
This is why I believe investors should stay in May. Just be invested more in mid and small-caps rather than the large-cap FTSE 100 index, particularly this year following strong recent performance from mega-caps like AstraZeneca and Royal Dutch Shell.
If you want to take a seasonal approach to your stockmarket investing, then note that September and October are the real danger months, when market volatility has traditionally been at its highest. So perhaps think of switching into bonds and cash over those two months of the year…