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'Sell in May, and go away'? It might be better to hold on, say stock market analysts

The famous ‘sell in May, and go away. Come back on St Leger Day’ stock market adage has endured for decades, despite being bad advice.

The origins of the phrase date from the time when the City was full of toffs who became more preoccupied with the social whirl in the summer than the market’s machinations.

There was Cowes, Chelsea Flower Show, Wimbledon, Royal Henley, Royal Ascot, the Epsom Derby (not necessarily in that order) and finally the St Leger, the final horse racing classic of the flat season.

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In theory the idea of selling in May in the era before 24-hour trading has a certain logic.

In practice even before the 1986 market shake-up, labelled ‘Big Bang’, it was about as reliable a piece of advice as you get from the average astrologer.

Using stats culled from Datastream, the City’s foremost provider of historical financial data, it emerges that in the 21 years before the Big Bang, there were 15  occasions when the All-Share index for the London Stock market was at a higher value in mid-September – which is when the St Leger is run – than at the beginning of May.

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In other words, in 21 years, selling in May and coming back on St Leger Day would have been a money-making strategy on just six occasions.

It is true that there were times when the strategy worked very well; most notably in 1974, when the All Share index fell 41.6 per cent between May and September. But that surely had far more to do with the aftermath of the three-day week, when Britain was brought to its knees by a dispute between the government and the coal miners.

 

What’s more, pursuing the same policy the following year would  have meant missing out on a 107.4 per cent increase in the stock  market between May and mid-September.

After the Big Bang in October 1986, the ‘sell in May’ policy has been just as flaky. And in just 14 of the 47 years since 1966 has the market been cheaper in mid-September than it was in May. That’s less than one year in three.

I am not sure it is statistically viable to do so, but taking an average of the All Share index change between May and September each year since 1966 gives an average (mean) gain of 8.1 per cent.

Equity markets are back to levels not seen since the onset of the credit crunch.

The FTSE 100 is up 13 per cent in the year to date, while the All-Share is ahead 14 per cent.

So there might be a quite natural inclination to book those profits.

But does the strategy of selling in May look any more viable this year? Strategists suggest doing so would be a mistake.

Bank of England governor Sir Mervyn King told us earlier this week the UK economy is on the road to recovery, and the experts believe this good news will have a knock-on, positive effect impact on the stock market.

 

There has also been a marked shift in investor behaviour as money has exited bond markets, finding its home in the equities markets.

‘There has been a clear preference for defensive and growth segments of the market, which has accentuated the valuation premium to cyclical and financials,’ Paul Jackson, an analyst at the bank Societe Generale, points out.

Deutsche Bank’s respected equity strategy team is predicting a ‘lending induced rise in spending’ that would boost the UK economy and may also lift the stock market.

So the best advice would appear to be ‘buy and hold’.

For, as our numbers reveal, to sell in May, and go away, is a strategy that just does not pay.

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