The old adage ‘sell in May and return on St Leger’s Day’ (last Saturday) is being dusted down again as autumn approaches. However, investors often forget that September is typically a bad month for stocks. Since 1970, it has been the worst-performing month for the FTSE 100. And October generally posts only minimal gains (let’s not forget the market crashes of October 1929 and 1987). So should investors be wary this autumn?
Investors should keep an eye on America as Wall Street sets the tone for world markets and the US provides 20% of the UK’s top 350 companies’ revenues. A key issue is that the jitters over inflation and slower global growth that triggered May’s sell-off haven’t gone away, notes Chris Brown-Humes in the FT. Optimists hope America has completed a two-year rate-hiking phase, although last week’s strong earnings data is the latest sign that inflation pressures are not yet contained.
Robert Parkes of HSBC says rate expectations have peaked and notes that on four occasions since 1982, world markets have risen by an average of 9% in the year following the top of the cycle. The relatively defensive FTSE flourishes in the post-peak slower growth environment. Parkes thinks it could hit 6,350 by the end of the year.
There’s also the housing-market-led slowdown in the US to worry about. Given the extent to which housing has underpinned the economy, the US consensus earnings growth forecast of 12% over the next 12 months appears over-optimistic. Tony Dolphin of Henderson Global Investors anticipates UK profits growth falling from 10% this year to 4% next as the global economy slows, with similar falls in other countries set to hold back markets around the world. He sees the FTSE and the S&P 500 going nowhere for a year.
But what if the US falls into recession? James Montier of Dresdner Kleinwort reckons there’s now a 45% chance of growth contracting; “on the way to recession, you always pass a sign saying soft landing”, he says. John Mauldin of InvestorsInsight.com has pointed out that US stocks typically fall 43% before and during a recession. Given all this, selling in September may prove a prudent strategy this year.