Sell in May and go away?

Although we’ve survived the first Friday the 13th of the year (it fell in April), we’ve already been overtaken by another apparition that makes an annual appearance: The ghost of May. 

“Sell in May and go away,” they say. This expression can be found in many headlines, articles and on social media every year, and every year I have shown that May-sellers have had little success over the past two decades when following this trend.

So what should you do? Should you be worried?

We are all aware that share prices and markets move up and down. 

But when we examine these trends in Graph 1 based on the FTSE/JSE All Share Index (Alsi) over the longer term (and by longer term, I mean decades), two things become clear:

First is that the general trend is upwards. 

Stock markets are trading higher today than they were 10, 20 or 50 years ago.

In fact, the Alsi managed to deliver an average of inflation plus 8.4% in annual returns over the last 20 years, despite the fact that we were on the verge of a massive correction 20 years ago, and actually experienced an even bigger one 10 years later.

Second, this upwards trend hasn’t all been one-way traffic: it has come with its share of potholes. 

These potholes, or drops in the market, are also known as market corrections.

Is the market cheap or not?

Although valuations are looking much better now, the market as a whole isn’t really cheap, and at its current price-to-earnings ratio (P/E) of 18.4 times is still trading comfortably higher than its 20-year average of 15.3 times.

Many will be eager to point out that Naspers* is a massive part of the index, trading at a P/E of 87 times all on its own. Increasingly, people have taken to excluding Naspers from their valuations in an attempt to justify market levels. 

It doesn’t matter how you look at it, though, because Naspers remains a part of the index: excluding it is like trying to build a bicycle without wheels. 

As an alternative, I would suggest using the FTSE/JSE All Share Limited Index (J303), which contains the same shares as the Alsi, but caps all of them at a maximum of 10% weight per share. 

But even when Naspers is limited to 10% weight, the market still trades at a P/E of 17.6 times (see Graph 2).

Sell in May and go away?

I always enjoy testing the success of this well-known market expression and this year is no exception. 

Investors may have had some success twice in the last three years if they had followed this trend, but quite a different picture emerges once we analyse the data over a longer period. 

If you had managed to make average-priced sales every May for the past 20 years, you would have been disappointed to discover that in 75% of the Decembers of those years, markets actually traded higher than in May. 

In other words, the May bears were only correct a quarter of the time.

The bottom line is that although the market isn’t priced cheaply, and although we can’t exclude the possibility of a correction due to the rising tensions between the US, China, Russia and North Korea, it remains of the utmost importance that you stay disciplined when it comes to your long-term asset allocation. 

Don’t give in to your emotions. Remain focused on the positive trend of the longer term. 

Schalk Louw is a portfolio manager at PSG Wealth.

This article originally appeared in the 26 April edition of finweek. Buy and download the magazine here, or sign up for our weekly newsletter here.