Industry Insider: Do Brexit negotiations mean you should definitely ‘sell in May and go away'?

Because traders were at the races rather than on the trading floor fewer stocks were bought or sold, so the stock market either traded sideways for a while, or any movement up or down was more pronounced. Therefore, it was suggested investors were better off selling their holdings in May and investing again on St Leger Day, the last leg of the British Triple Crown horse races in September, marking the end of the summer festivities and a return to work.

Putting this strategy into practice faces some limitations. There are likely to be transaction costs and, if you’re investing outside an individual savings account or pension, maybe capital gains tax implications, too. And while there’s a certain logic to ‘selling in May’, times have changed. Technological advances mean that stock-market traders and fund managers can still monitor the markets and their investments without having to be in the city.

 

There is also very little evidence to suggest that the strategy works. If you look at the FTSE All Share index, which captures performance of 98% of the companies listed on the London Stock Exchange, over the past three decades, it’s not clean cut at all.

We looked at the total return from the FTSE All Share index (with dividends reinvested) from 1 May to the second week in September over 31 years to September 2016. While people following the sell in May adage would have avoided losses of 18% and 21% respectively in 2001 and 2002, over 31 years they would also have missed out on 20 summers of positive returns. Last year, investors selling in May would have missed out on gains of almost 9%. See the table below for the full details (click on the image to enlarge it).

The burning question is what will happen this year? Theresa May has triggered Article 50 and officially started the process of Britain leaving the EU, but it will be some time before negotiations begin. A special Brexit summit with all EU member states will be held on 29 April to draw up guidelines, but then there will be all sorts of legal processes to get through. So the earliest we can expect negotiations to begin is mid-May, and they could drag on for months – if not the full two years allowed.

The French election on 7 May and the German election on 24 September make good bookends for our adage’s timetable and could create uncertainty. The markets will be keenly watching the populist vote across the Channel.

Across the larger Atlantic, we have other considerations. After weeks of negotiations over the Health Care Act, President Trump failed to make good on his election promise of ousting Obamacare in March, so he has instead turned his attention to carbon gas emissions. Worries that tax reforms are getting pushed to the bottom of his agenda and that infrastructure spend may not be as great as was once thought have already resulted in a ‘Trump Slump’, with markets taking a breather. Much of these concerns could already be priced into the market before we even get to the month of May. And we could just as easily see markets have a relief rally over the summer – if some worries prove groundless – as we could see falls.

 

A lot can go wrong if you try to time the market, so I believe most people are better off ignoring this adage and should invest as and when they have the money, especially if they are a fund investor rather than a stock investor.

And if all else fails and the summer is a washout in terms of equity returns, there’s always the Santa Rally to look forward to the week before Christmas and New Year!

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mr McDermott’s views are his own and do not constitute financial advice.

Darius McDermott is managing director at Chelsea Financial Services and FundCalibre.

More about