State of Play – Sell In May and Go Away!

This old adage is well known in sharemarket circles. It is said that this centuries-old phrase reflected investment professional’s views that the peak of the annual price cycle occurred in May, and that shares should be cashed out, and investors should hold off until reinvesting in November. As we can see in the above chart, there has been minimal selling in May 2021.

There’s plenty of evidence to show the “sell in May” strategy hasn’t been relevant for many decades, however, the adage does raise the question – what, if anything, will cause a sell-off?

Before I provide my views on that question, it is worth recapping the last 3 months of sharemarket action. The ASX as an index has returned to record highs, completely putting the 2020 COVID correction behind it. I find the last 12 months of above chart dramatically beautiful. You could not have asked for a better recovery! Some sectors in the market continue to lag. Travel is the obvious one. The major banks (reporting excellent results and paying substantial dividends) and our large minors (on the back of a record iron ore price) have soared and pulled the index along with it. Huge sums of cash on the sidelines, ongoing government stimulus and a market-accomodative Budget look set to keep the ASX on it’s upward trajectory for some time yet.

While I am the eternal optimistic, it would be naïve to assume that this market positivity will continue without some hiccups along the way. This brings us back to the question – what, if anything, will cause a sell-off?

Well, as we know, markets are driven by sentiment, and investors’ sentiment can change quickly. Given the lack of investment alternatives to generate growth and income (addressed in our article here), I don’t necessarily see a sell-off primarily based on taking profits. I think there are two things that can trigger a correction – pandemic and inflation. Of course there are many others – geopolitical risks with China trade and a correction of the iron ore price come to mind – but I’ll focus on the pandemic and inflation below as their impacts will be broad-based.

While the vaccine rollout globally has been successful and the efficacy is positive, there is a view that the Australian rollout is somewhat complacent and slow. The market has largely been ignoring this, as well as State-based lockdowns. As far as sharemarkets (and therefore investors’ sentiment) are concerned, the pandemic seems to be old news and under control. Where I think sentiment could change quickly, is if the vaccine loses effectiveness against newer strains of the virus. We certainly would never wish this, but if outbreaks occur of strains that are less than effectively treated by the vaccine putting the global recovery at risk, the mood could change.

While inflation can impact each company/stock differently, broadly inflation is an enemy of sharemarkets. Fundamentally, inflation is usually a sign of a strong economy and should be a good thing for share markets. In the short term though, it can have the opposite effect. Long term inflationary pressures may see the winding back of extraordinary government stimulus measures which are acting to ensure stabilised asset prices. Central banks may need to explore raising interest rates to reign in inflation.

Our view is that while inflation will be a topic of conversation as part of the ongoing global reopening, it’s impact should be temporary. Any spikes in inflation are likely to be short-lived and a response to significant increase in demand for goods and services as we reopen. The stimulus is not ongoing and we can only “reopen” once or twice, so we think normality will eventually resume. Any sharemarket corrections due to inflation are likely to create buying opportunities. A “spike in inflation” also needs to be put into context, we are coming from a very low base!

The world of sharemarkets and economies is ever-evolving, and is almost always fascinating to us. If you want another point of view about whether or not your investment strategy is set up to maximise your opportunities for decent returns, don’t hesitate to contact one of our advisers.

This website contains general advice which does not consider your particular circumstances. You should seek advice from Wakefield Partners who can consider if the general advice is right for you.