If you sold shares in May, buy them back today: HAMISH MCRAE on why the stock market could rise

The St Leger in Doncaster is the oldest classic horse race in the world and was held yesterday. So how did that old investing adage – sell in May and leave, come back on St. Leger’s Day – work this year?

Well, if you juggle the timing a bit, not so bad in Britain, but terrible in the US.

This illustrates two investment phenomena of the summer: the extraordinary resilience of the US market, despite being written off by many professional investors earlier this year; and the rather dismal performance of stocks here.

So what now?

> Stock market data: FTSE 100, 250, All Share and company share price charts

Take a step back for a moment. The idea that there is a seasonal lull in stock prices during the summer has been around for a long time, and there is some supporting data.

According to research into the UK market, April has been a fairly strong month over the past forty years. May and June were weak. But July was generally good, while August and September were disappointing.

This year the best time to sell was mid-April the FTSE100 was above 7,900, and as is the case when I wrote about the saying “sell in May.”

But the time to buy back would have been late August, when the index languished below 7,300, rather than waiting until September.

Indeed, in mid-May, the Footsie was between 7,700 and 7,800, about where it is today. So it was a useful guide, but not a brilliant one.

But if you had heeded the ‘sell in May’ message for US stocks, you would have missed a blistering market.

The S&P500 is up about 10 percent from May and 18 percent year-to-date. The Nasdaq index for high-tech stocks rose about 20 percent in May and 34 percent at the start of the year.

That was not what most US equity strategists expected in April. One of them bravely stuck his neck out and predicted that the S&P500 would fall by 22 percent this year.

There is clearly still a lot of money in America looking for a place to go.

The strong performance of Arm shares, our Cambridge chip designer, after last week’s IPO in New York is a sign of this. Fomo – the fear of missing out – is back.

Where next for the stock markets?

What about the future? Starting with the US markets, the pessimists, and there still are, believe that profits will be hit hard by the coming slowdown and that this will remove the justification for the current turbulent share prices.

The optimists think that any slowdown will be mild and that the markets are at least mature enough to look through it for further growth. That tension will remain, but both will recognize that the world must be close to the peak of this interest rate cycle.

Last week, the European Central Bank did raise interest rates, but seemed to give a signal that the peak was in sight. The Federal Reserve is expected to pause interest rate hikes this week, and there is a chance the Bank of England will do the same.

So for America, the prevailing view is that while stocks are expensive by historical standards, fears of a stock market crash this fall have subsided.

The UK stock market is still cheap

Here it is different for two reasons. First, we don’t have mega-cap high-tech companies like the US. The only serious competitor we mentioned in London was Arm, which was bought by Masayoshi Son’s SoftBank for £26 billion in 2016 and now trades in New York at a value of around £56 billion.

Secondly, London offers investors a different proposition: solid companies with more traditional activities, generating decent dividends.

The shares are cheap, both by historical standards and relative to US markets.

The Footsie has a price-to-earnings ratio of 11. That compares with the S&P 500 at 20 and Nasdaq at over 30 – and a historical rating over the past ten years of 16.

London shares are even cheap compared to those in Frankfurt, despite the weak performance of the German economy. The DAX index has a price-earnings ratio of 13.

This continued undervaluation of the London market is infuriating and we have explored the reasons for it in this article, including the fact that UK institutions do not invest in UK companies for regulatory reasons.

It’s insane, and the best that can be said is that at least the problem is now being recognized.

But undervaluation will always be corrected. That is always the case, even if it takes an extraordinarily long time. So if you sold in May, it might not be a bad time to get back in.