We won’t see a Wile E Coyote fall, says HAMISH MCRAE: markets are unlikely to run off a cliff and plummet to earth like the limp cartoon character
Sell in May and go. That’s the popular saying on Wall Street that’s been around for at least a century, though its origins probably date back even earlier to stock trading in Victorian London.
Well, we’re not quite into May yet, but you don’t have to listen closely to hear the rumble of thunder that warns of a sharp downturn in US stock prices.
Several renowned US market strategists predict just that. One that caught my eye last week was FS Investments’ Troy Gayeski, who expects the S&P500 to fall 22 percent and says you shouldn’t wait until May to get out.
That’s bold, candid stuff, and he’s not alone. But stock prices on both sides of the Atlantic have remained fairly solid in recent weeks, and that’s a clear reminder of another investment saying: that it takes two points of view to make a market. So what should we think of these warnings?
First a general point. There do seem to be indications that markets do better in winter than in summer. Since 1945, the S&P 500 has risen an average of 6.7 percent between November and April, though only about 2 percent between May and October. But it doesn’t always work. In the most recent bear market, the S&P500 peaked in late 2021 and took a vicious downturn in May and June before bottoming out last October. It was good to buy in October, but selling in May was too late.
Feckless: Wile E Coyote always got into trouble, like he ran off a cliff and plummeted to earth, in pursuit of his cartoon nemesis Road Runner
The timing worked better here, as last year the FTSE 100 index traded in the 7,400-7,500 region in May before dropping below 7,000 in early October. And since then we’ve gone through 8,000 to reach the highest point ever. But this is only one year. As we all know, there are no foolproof rules that ensure investment success. Now to the arguments about markets this year. One of those two views that make a market works like this. Equities have not priced in the blow to earnings during the coming US recession. It’s a Wile E Coyote market. You know the cartoon character, Wile E, who runs over the cliff and keeps running in the air; only when he looks down and sees there is nothing below him does he suddenly plunge to the (much lower) ground below.
The other view is that while the coming downturn will weigh some on earnings, it won’t be too severe and will be offset by the drop in inflation, which will at least allow the Fed to lower interest rates. Markets are mature and can look through the dip to growth.
I lean towards the second view, largely because I expect US consumer spending to continue and that will support corporate earnings. But we should all be aware that US investments are becoming less fashionable globally, that the dollar will fall further, and that US equities are not a screaming buy at current valuations. The S&P 500 has a price/earnings ratio of around 22, while the Footsie is below 15.
So what does this mean for us in the UK? We have an unexciting year ahead, with the economy not doing as bad as the IMF forecasts, but with limited room for much revival.
In terms of domestic demand, much depends on whether UK consumers will be willing to reduce their savings to maintain their standard of living until inflation eases, and whether the housing market stabilises.
For Footsie members, however, what matters is what’s happening to the global economy, which generates roughly three-quarters of their revenue, either through exports or through the profits of foreign subsidiaries. The outlook for the global economy is undeniably bumpy.
But at least the UK market offers value. You can buy the shares of large and successful companies at a reasonable price. That’s true regardless of the Fed’s decision, however much the European Central Bank raises rates, whether or not UK rates have peaked or not – all contingencies that market analysts ponder.
And we seem to be moving towards a climate that pays more attention to tangible value rather than intangible hopes for growth.
So selling in May? Look, if investors are really uncomfortable, they should go with it, whether it’s April, May, June, whenever.
But unless you reject stocks completely, you have to get back in, and getting back in is just as hard to time as getting out. The original British version of the saying goes that you must come back on St. Leger’s day. For what it’s worth, the 2023 St Leger, the final classic of the flat racing season, runs at Doncaster on September 16.