Specialist ponders “sell in May” rule

According to Ad van Tiggelen, senior investment specialist at ING Investment Management, the old adage “sell in May” is a rule of thumb that works.

He said that between 2010 and 2012, the US equity market rose 8% on average in the first four months, then fell 7% over the summer and then recovered by 8% in the last four months of the year. Looking at markets now, van Tiggelen said that worsening economic data suggests it could be time for investors to take a market holiday. “Developments this year certainly show a worrying similarity to previous years: after a strong start to the year, equities have lost some momentum, driven by weakening economic data and a lacklustre start to the earnings season. This fact alone makes a summer exit from equity markets almost look like a no-brainer,” he said.

But van Tiggelen said there are now some clear differences with the past few years. In previous years, the Eurozone had severe problems but it now looks more stable, with falling bond yields on the periphery. Also, the US economy is on a better footing, with house prices and employment both recovering. Inflation expectations are also muted, due to falling commodity prices and low wage growth.

As a result of these conditions, investors are searching for yield, which could hold up prices of defensive equity stocks, while cyclical stocks and financials are unlikely to fall sharply in value unless the euro crisis flares up again. “To conclude, we think equity markets can hold up reasonably well over the summer months, even in the absence of positive economic surprises or broad- based central banks stimulus. It is the absence of alternatives which is likely to support equity prices, more than anything else,” van Tiggelen said.