This could prove to be one of those rare years when the stock market adage “Sell in May” turns out to be the right decision. The saying is irrational and so is the mood in the markets so perhaps there is some symmetry in it all.
Readers who have followed this column for some years will know that few commentators are as scornful as I am about the senseless notion that you should automatically sell your shares at the start of the summer and buy back in the second half of September. It rarely works well.
However, the FTSE 100 index has slumped 10% from its record high of 7,100 points in April and was this week trading below the level at which it began the year. There is a lot of ground to make up before the St Leger, the supposed start of the share buying season, is run.
Yet the UK economy is remarkably robust. GPD grew well up to expectations at 0.7% in the second quarter, exposing the 0.4% growth recorded in the first quarter as being an aberration. Once again concerns have been raised about the failure to balance the economy, with manufacturing slipping and construction flat, but when the best part of the economy, services, is growing strongly so too is the whole economy.
Given the fears we have had that banks might flee abroad and undermine London’s status as the financial centre of Europe, this is really good news.
What is more, the renewed fall in the oil price is keeping inflation low and is in effect subsidising the rise in living standards while delaying the inevitable first rise in interest rates. There is one last chance for companies as well as individuals to pay down debt as far as they can to minimise the pain that will come slowly but inexorably.
The big fly in the ointment is China. We could ignore the collapse on the Shanghai Stock Exchange to some extent for as long as we were distracted by Greece. Now we can pretend that Greece is settled for the foreseeable future, our attention is draw increasingly to events in China.
However, the situation there has been heavily overplayed. Despite a fall of more than 8% in all the key stock market indices in a single day on Monday the Shanghai market is merely correcting a massive overbuying spree last year. Shares there are still higher than they were 12 months ago.
News of the better GDP figures in the UK were not enough to overcome the gloom hanging over the market, gloom that, like the cold weather, looks set to continue. Investors must decide whether to stay out of the market for the rest of the summer, following the adage, or take the buying opportunity that has now arisen.
I am firmly in the latter camp and am looking to invest the rest of my ISA allowance while the opportunity lasts. I’m just choosing a bit more carefully than usual.
Whatever Happened to Gold?
Since gold has value as a commodity as well as a store of wealth you might think its price should always be underpinned. Alas, it is out of favour on both counts. At the current rate of progress it will soon have lost half its value since it peaked top side of $1,900 an ounce four years ago.
If there is enough worry for investors to knock more than 500 points off the Footsie since April, surely that should be showing through in the rising price of gold. Yet the talk now is of the US dollar, not gold, being the safe haven.
Gold is not an investment, it is a gamble on how the price will move next week. The betting is that next week it will fall further.
If you are tempted to bank on gold, consider buying it at $1,000 on the way back up. Note: NOT on the way down. My guess it is going all the way to $800, its 1980 trough.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice. His views are not necessarily the views of Morningstar UK.
