It’s that time of the year again and although Friday the 13th came in April, there is another ghostly apparition that makes its annual appearance every year: The ghost of May. “Sell in May and go away”, they say. This expression can be found in many headlines, articles and in social media every year, and every year so far, I have shown that May-sellers have had very little success by following this trend for the last 20 years. What should we do? Should you be worried?
We are all aware of the fact that share prices and markets move up and down. When we take a look at these trends in Graph 1 based on the FTSE/JSE All Share Index over the longer term (and by longer term, I mean decades), however, two things become clear:
First, is that the general trend is upwards. Stock markets are trading higher today that they did 10, 20 or 50 years ago. In fact, the FTSE/JSE All Share Index managed to deliver an average of inflation plus 8.4% in returns per year over the last 20 years, despite the fact that we were on the verge of a massive correction 20 years ago, and the fact that we actually experienced an even bigger one 10 years later.
Secondly, this upwards trend wasn’t one-way traffic and it certainly didn’t come without 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 still isn’t really cheap, and at its current price earnings ratio (PE) of 18.4 times, it’s still trading comfortably higher than its 20-year average of 15.3 times.
Many will be eager to point out that Naspers forms a massive part of the index, trading at a PE of 87 times all on its own, and I have seen an increasing amount of people lately who have excluded Naspers from their valuations in an attempt to justify current market levels. It doesn’t matter how you look at it, though, Naspers is and will remain a part of the index and excluding it is like trying to build a bicycle without wheels. As an alternative, I would suggest making use of the FTSE/JSE All Share Limited Index (J303), which contains the same shares as the All Share Index, but they are all capped at a maximum of 10% weight per share. Surprisingly, even by using this index where Naspers is limited to 10% weight, the market is still trading at a PE of 17.6 times (see Graph 2).
Sell in May and go away?
As always, I enjoy testing the success of this well-known market expression and this year was 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 term. If you had managed to do average-priced sales every May over the last 20 years, you would have been disappointed to find that 75% of the Decembers in those years, markets actually traded higher than in May. In other words, the May bears were only correct 25% of the time.
The bottom line is that although the market isn’t priced very cheap at the moment, and with tensions increasing between the USA, China, Russia and North-Korea, we aren’t able to exclude the possibility of a future correction, it still remains of the utmost importance that you remain disciplined when it comes to your long-term asset allocation and that you don’t give in to your emotions. Remain focused on the positive trend of the longer term.
The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice in any way. This is intended as general information only and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained herein. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.