This has been a strategy applied by investors in the stock market over the years. It is a classic market adage which is also known as the Halloween Theory as the time to re-enter the market is after Halloween. (End of October). The saying dates back to old England when the stockbrokers would go on summer vacation in May and not return until September.
According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has had an average gain of 7.5% during the November through April period and a gain of only 0.3% over the May through October period, going back to 1950.
What relevance is there in this history when we finally assess the damage brought to the Global economy after COVID 19 has passed.
Coming out of COVID 19 Lockdown what you shouldn’t do?
Ignore fundamentals Fundamentals navigate an economy creating sets of information such as employment, inflation and interest rates, growth (GDP) which frame the condition and direction in which it is heading. How can business survive in this severely damaged economy is the main concern. Yes, you may expect the share to do well in the future and think that it may be a bargain now. However, there is a new normal that has to be established after COVID 19 and the current exuberant bounce back to previous valuation on the markets may well be way over priced. Certainly there is a disconnect from fundamentals.
Speculate
The markets are not for the short term unless you want to speculate which is just another name for gamble. On March 20th this year the markets experienced the sharpest fall in financial history off the news of the global lockdown and the anticipation of the consequences to world economies.
Some saw this as a buying opportunity as the values at the bottom seemed to be bargains. Speculators took full advantage and bought in the midst of the uncertainty. What they did was bet that the price of their shares would rebound to their previous highs ignoring the obvious outcome of this pandemic – economic devastation.
Rely on past performance.
The extraordinary ‘bounce’ recovery of the markets from the historic crash has created many questions around the sustainability of the share prices. Past performance cannot predict future as the financial world is being rescued by central banks pouring money into their economies providing a band aid and not a cure. The real damage has been masked and has yet to be established. So, do not be enticed into these markets too quickly based on past performances. Sell in May have some relevance, but how different will things be? It’s a big question! So, be very, careful and patient while the effects of this pandemic play out. The world definitely won’t be the same.