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14th May 2021
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Graham BentleyGraham Bentley

May 2021 (covering April)

At this time last year, this commentary reflected on the rise of COVID, 250,000 associated global deaths, and economies grinding to a halt. TS Eliot's "The Waste Land" identifies April as "the cruellest month", and the future seemed especially bleak. However, I did warn against being overly negative where economic outlook was concerned, opining that while no one can forecast the future, economists are especially useless at it.

Here we are in our future

Almost 3,000,000 additional deaths later, the major economies are reopening, and stock markets' astonishing growth continues. During the first quarter of 2021, "Value" companies - mature, out-of-favour companies with share prices lower than might be expected given their earnings and dividend payments - had benefitted by what might be termed a "dash for trash". However, April saw a reversal of this trend, with more expensive "Growth" companies - who tend to reinvest their profits back into the business rather than distribute them as dividends to shareholders - back in favour, providing double the returns of value companies over the month.

The UK market is up

The UK market is up over 4% through April, and essentially back where it was in February last year, after a remarkable 50% rise from its nadir on 23rd March 2020. Remarkably, funds investing in smaller UK companies are now on average 20% higher than they were last February. Gaining almost 7% in April, they have grown by over 100% since their March 2020 low. 

April's gain can be explained quite simply by continued good news; vaccine rollout has continued, and new COVID cases have plummeted. The Office for National Statistics announced that almost 70% of adults were likely to have had COVID antibodies in early April. Increased confidence is reflected in manufacturing data published during the month that confirmed the economy was growing very quickly, and retail sales were up 5% in March. Much of that represents the release of pent-up demand, with savings accumulated during lockdowns likely to fuel a short-term boom.

The US economy is growing rapidly

This is a story repeated with even more intensity in the US. Savings have increased dramatically, and along with the stimulus cheques households received this has fuelled an astonishing reported rise of 10% in retail sales figures in March. The economy is growing rapidly, unemployment is plummeting, and company earnings forecasts have been significantly exceeded in many cases. Indeed, the signs are that US companies may be growing more quickly than at any time since 2009. The S&P index of the leading 500 US companies rose by 5% in sterling terms. 

Can these market rises continue at the same pace?

Last month's commentary reflected on inflation fears due to economies' potential to 'overheat'. The remarkable figures from the UK, and particularly the US will have added fuel to that particular fire. However, while key longer-term inflation indicators remain flat, a major fear is that businesses may not have sufficient stock to satisfy the sudden surge in demand. Many of us will already be experiencing this, with delays on delivery of some purchases for several weeks if not months. These so-called 'bottlenecks' encourage those with stock, and the suppliers of components who are recovering from COVID-induced production cuts, to increase their prices - a classic economic response to increased demand and reduced supply. Many readers will have experienced this too. Companies with pricing power will pass these increases to customers, while others in highly price competitive markets will find that solution more difficult and suffer lower margins. These bottleneck price increases had been predicted by the Fed, describing them as 'transitory', and hence not and indicator of permanent inflationary increases. As the world gets back to work and supply, manufacture and distribution resumes 'normal service', the Fed expects inflationary effects to dissipate. So can these market rises continue at the same pace?

Sell in May?

You may have heard the phrase "sell in May, go away, come back on St Leger day", a reference to the early 19th Century monied gentry's habit of leaving the City for the summer. The lack of trading activity during those months of May to September led to the belief that share prices would be flat between late Spring and Autumn. US investors (not known for 5-month summer sojourns, admittedly) more recently adapted the dates to Memorial Day and Labor Day in their version of the 'strategy', if it can be so described. While today we do stagger annual holidays across July and August, the City (COVID aside) is hardly a ghost town for 5 months, so does that effect persist?

If we look at the UK market since the formation of the FTSE All-Share Index in 1962, and for simplicity look at 6-month periods, over 59 six-month periods covering May Day to Halloween, the median return has been close to zero, while the other set of 6-month interludes has a median return of almost 9%. However, note I chose median, rather than average. There are some 'outlier returns', e.g. to April 1975 where the market rose 76%, after falling 39% between April and October 1974. The 6-month period to April 30th this year is another example. Also remember, these are index movements that carry no management fee, and investors looking at this strategy would be paying transaction fees every 6 months. And the effect isn’t consistent - 18 of the 59 periods saw the opposite effect, and we can't predict which years will reflect the adage, and those that don't.

Market timing doesn't work

The common theme we try to reiterate through all our investment messages is market timing doesn't work. Rather like quantum theory, observing a market phenomenon seems to change the outcome; just when you want to take advantage of it, it stops working. 

Long-term investing is just that - sticking with the programme rather than complicating it.


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