You can’t always rely on stock market adages – City Comment
26 September 2013
The old stock market adage recommends that investors “Sell in May and go away, don’t come back til St Leger’s Day” (this year late October). As with many sayings there is a high degree of science backing the recommendation.
Thu, 26 Sep 2013 | By Adrian Kearsey, equity analyst at Hardman & CoThe old stock market adage recommends that investors “Sell in May and go away, don’t come back til St Leger’s Day” (this year late October). As with many sayings there is a high degree of science backing the recommendation.
Average returns over the summer months are typically lower than rest of the calendar. For example, market returns in the UK over the last 27 years have shown that May, June, August, September and October have been the five weakest months of the year (on average). Indeed, the average return for June and September has been negative 0.3% and negative 0.9% respectively. The average monthly return for the May-Oct period has been 0.2%. This compares with 1.6% for the rest of the year. So there is clear outperformance in the autumn through to spring period.
The reason for this disparity is unclear. Lower trading volumes in the summer months are often cited as the main driver for lower returns. However, in many years macro specific factors have been the catalyst for negative movements in the stock market. For example, in the summer of 2008 the credit crisis was in full swing, culminating in Lehman’s going pop that September. In 2011, the euro crisis and the downgrade of the US credit rating from AAA to AA+ in August prompted concerns for investors.
So how is it panning out this year? From January to the third week in May, the UK market was up 16% (a monthly return of 3.4%). These gains were being driven by the availability of cheap money created by unparalleled quantitative easing, a more relaxed position in Europe and strong macro indicators in the US (notably with positive GDP and labour data). Investors were clearly pricing in earnings estimate upgrades for cyclical stocks. For example, both Michael Page and SThree were trading on a price earnings ratio of 25x. For the years before the recession they averaged 14x and 12x respectively) and other segments of the market were also priced for positive news flow. Therefore, when stocks failed to provide sufficient positive surprises, investors once again focused on the macro picture and let the market slide and within a month shares had fallen (on average) 11%.
However, since the end of June shares have rallied 10%, bolstered by accommodating comments from central bankers (who have indicated that interest rates will remain low for the foreseeable future and quantitative easing remains on the agenda). Many of the staffing stocks have performed even more strongly than the market. For example, since June we have seen Hays shares up 32%, Michael Page +35%, Matchtech +33% and Staffline +39%. Earnings multiples for Hays and Page are once again quite full (20x and 29x), indicating the market is expecting estimates to rise. However, Matchtech and Staffline, which have provided upbeat updates, are seeing their shares trading on a 34% and 48% discount to the larger two stocks, providing scope for the valuation to move higher.
Therefore, while the market remains 2% below its May highs, investors would have missed considerable excitement (and opportunities) in recent weeks were they still waiting for St Leger’s Day.
Average returns over the summer months are typically lower than rest of the calendar. For example, market returns in the UK over the last 27 years have shown that May, June, August, September and October have been the five weakest months of the year (on average). Indeed, the average return for June and September has been negative 0.3% and negative 0.9% respectively. The average monthly return for the May-Oct period has been 0.2%. This compares with 1.6% for the rest of the year. So there is clear outperformance in the autumn through to spring period.
The reason for this disparity is unclear. Lower trading volumes in the summer months are often cited as the main driver for lower returns. However, in many years macro specific factors have been the catalyst for negative movements in the stock market. For example, in the summer of 2008 the credit crisis was in full swing, culminating in Lehman’s going pop that September. In 2011, the euro crisis and the downgrade of the US credit rating from AAA to AA+ in August prompted concerns for investors.
So how is it panning out this year? From January to the third week in May, the UK market was up 16% (a monthly return of 3.4%). These gains were being driven by the availability of cheap money created by unparalleled quantitative easing, a more relaxed position in Europe and strong macro indicators in the US (notably with positive GDP and labour data). Investors were clearly pricing in earnings estimate upgrades for cyclical stocks. For example, both Michael Page and SThree were trading on a price earnings ratio of 25x. For the years before the recession they averaged 14x and 12x respectively) and other segments of the market were also priced for positive news flow. Therefore, when stocks failed to provide sufficient positive surprises, investors once again focused on the macro picture and let the market slide and within a month shares had fallen (on average) 11%.
However, since the end of June shares have rallied 10%, bolstered by accommodating comments from central bankers (who have indicated that interest rates will remain low for the foreseeable future and quantitative easing remains on the agenda). Many of the staffing stocks have performed even more strongly than the market. For example, since June we have seen Hays shares up 32%, Michael Page +35%, Matchtech +33% and Staffline +39%. Earnings multiples for Hays and Page are once again quite full (20x and 29x), indicating the market is expecting estimates to rise. However, Matchtech and Staffline, which have provided upbeat updates, are seeing their shares trading on a 34% and 48% discount to the larger two stocks, providing scope for the valuation to move higher.
Therefore, while the market remains 2% below its May highs, investors would have missed considerable excitement (and opportunities) in recent weeks were they still waiting for St Leger’s Day.
