Same discussion every year: May sell out and go away?
Are there really stock exchange rules one can stick to like sacred images? One of the most famous is that in May, before the summer months of weak stock markets, investors are advised to sell their shares. They should be back in September to take advantage of the year-end rally. Has this rule worked in the past, and if so, can it also be used to derive regularity for current stock market developments?
Once upon a time… the good old stock exchange days. At the time, Western financial markets were still largely on their own and completely separate from emerging markets, which were still of little importance. Policy/Monetary Policy assumed the role of arbitrators who set the overall framework for the economy and financial markets. Yes, based on the S&P 500, for example, since 1950, the weakest stock market phase between May and October compared to November through April can be averaged around five percentage points.
It is not the rules of the stock exchange, but the market that determines
Is this stock market wisdom still relevant? First, professional investors and hedge funds will destroy any financial market base that runs halfway through proper speculation.
In addition, external influences are increasing. There are new children in the building. Emerging countries like China have always been systematically related to the (financial) world in geopolitical and economic terms and unconcerned with Western seasonal patterns that give rise to like a plow generating a field in the spring. Always somewhere in the world something happens that, due to globalization, eventually reaches the classic exchanges like falling dominoes.
Above all, fiscal and monetary policy is no longer holding back. The referees became the actual game makers on the exchanges. Whether it is real estate, financial, debt and banking crises, Brexit, trade war or euro rescue, politicians now have to block their targets and defeats not just seasonally, but 365 days a year. Even in the hot season, the bailout policy is not locked down, which supports the financial markets.
Yes, the Greek crisis was resolved in the summer 2015 recession, which later gave the DAX a 20 percent increase. Or 2022: In light of the lavish government measures and monetary policy assistance to confront Corona, the pace of the stock market’s rise accelerated in May of that year. It would be a shame if the May rule was followed.
Can the stock market rule come true this year? Monetary policy in the US and Europe will not be as stringent on inflation as their tough rhetoric suggests. The fact is that the financing of excessive indebtedness, green economy restructuring, digitization, rearmament, and mitigation of economic and social risks from the Ukraine war, do not allow the inversion of radical monetary policy without opening Pandora’s box. Here the former mantra of a popular electronics retailer also applies to a monetary politician: “I’m not stupid.”
In any case, it is conceivable that inflation will gradually peak in the summer. Inflation surprises in the US are already starting to reverse in a positive way. This reduces fear in the stock market of exaggerated interest rate increases by the Federal Reserve in the summer recession.
In any case, financial markets have already done a lot of work for the Fed with higher interest rate expectations. So it should become itself less restrictive.
Of course, right now, there are some signs of a mainly rainy stock market summer such as fragile supply chains, raw material scarcity, and Covid shutdowns in the former temple of economic growth in China, which are already causing mourning flags in reporting season and in outlook. But if China, for example, eases its coronavirus lockdown, the tables could turn again, especially on economic values.
But bad things can also happen. The biggest unknown is the development of the war in Ukraine, with all its consequences for energy supplies and prices.
So there is no fundamental certainty about how the stock markets will develop from May onwards.
But even when it comes to paying, there is no kinship in stocks that collectively push everything either up or down. The stock market is a big wardrobe staple these days: something always goes with it. Sometimes value, then growth, sometimes IT stocks, then again cyclical, then defensive qualities, sometimes conventional energy stocks, then environmental and alternative energy stocks. This means that the absolutely formulated Mayo rule breaks down even more.
In general, the stock markets this year do not have rib fat, which investors can now eat in the form of sales.
It is not the past that is traded on the stock exchange, but the future
Today, the wisdom of the stock market in May is no more compelling than the wisdom of the weather for the Ice Saints. What’s still sacred about cold Sophie today? It may be cold, but we can also sweat at 30 degrees.
In general, it does not make sense for investors to bet on this seasonal joke in the stock market. At the stock exchange, people don’t ring the bell as they do in the schoolyard to know when a break starts and when it ends. Otherwise, there will only be millionaires in the stock exchange.
And even if prices fall in the summer, there is no need to stray from the stock market. Falling prices are an attractive environment for common stock savings as an attractive form of long-term retirement. It is also better to buy a washing machine cheaply. The profit lies in the purchase. If that’s not really the golden stock market rule.
On the other hand, the statement you read after each security recommendation fits the May rule: Past price movements are no guarantee of future performance.