Sell in May and go away?

It seems like only yesterday that we took down the Christmas decorations, only to realise that nearly five months have already passed in 2017. Better earnings growth in the resources sector helped us to shake off the negative year-on-year growth, but growth remains in the single digits while our market is again trading above a price-to-earnings ratio (P/E) of 20 times.

“Sell in May and go away,” they say. Roughly a year ago, I pointed out that May sellers haven’t been all that successful in the last 20 years. So what should we do? Should we be worried?

We all know that markets and share prices alike move up and down. But when we look at these trends in Graph 1 over the longer term (and by longer term I mean decades), two very important details become clear:

The first is that the general trend is up. Stock markets are trading higher today than they were 10, 20 or 50 years ago. In fact, it has delivered a return of almost 8% more than domestic inflation over the last 50 years.

Second, it may move upwards, but it isn’t a one-way street and it definitely doesn’t come without potholes. These potholes or drops in market movements are also known as market corrections. 

Is the market cheap or not? 

The market definitely isn’t cheap and at its current P/E ratio of 20.2 times, it is trading much higher than its 20-year average P/E of 14.8 times. Many will point out, however, that Naspers* makes up a large portion of the index and that it is currently trading at a P/E of more than 96 times. 

I also see more and more people that exclude Naspers from valuations to try and justify current market levels. The fact is, and will remain, that Naspers does form part of the index and by excluding it from valuations, you may just as well ask someone to make you a peanut butter sandwich with no bread.

Rather use the FTSE/JSE All Share Limited Index (J303), which contains the same shares as the All Share Index, but with a 10% maximum limit per share. Interestingly, however, even by using this index where Naspers is limited to 10%, the market is still trading at a P/E of 19.4 times (see Graph 2).

So, sell in May and go away?

I always enjoy testing the success of this well-known saying by running historical data. This year will be no exception. It may have served you well if you had followed this route in May for the last two years, but even this doesn’t guarantee that another correction will follow.

If you sold your FTSE/JSE All Share Index shares at the end of May every year for the last 50 years, the markets would have traded higher in December than in May during each of those years for 63% of the time. That means that the sell-in-May-bears would only have been correct about a third of the time. 

This year, I’ve decided to take things a little further. If you really had to choose a month in which to sell, January would be the more likely choice, simply because on a 12-month rolling basis, it delivered the worst earnings over the last 50 years. Unfortunately, it doesn’t rhyme with “go away”. In fact, on a rolling 12-month basis, May was the second-best- performing month out of the 12 months. 

The bottom line is that although the market is priced quite high at the moment, and in the midst of political instability we cannot necessarily exclude the possibility of a correction, it remains important to stay disciplined when it comes to your long-term asset allocation and to not give in to your emotions. Stay focused on the positive trend over the long term.

*finweek is a publication of Media24, a subsidiary of Naspers.

This article originally appeared in the 18 May edition of finweek. Buy and download the magazine here.