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A post-wedding sell-off – should equity investors say ‘I do’?

Do ‘calendar effects’ have any real relevance in today’s markets?


Such are the benefits of 30 years’ worth of hindsight.

"Will it be this time?", Fidelity asked. "Investors will hope that, just like 1981, 2011 turns out to be the start of an extended equity bull market."

The end of April is certainly a good time to make somewhat arbitrary connections between two separate time periods, coming as it does just a few days before the "sell in May" (and buy back in September) headlines start arriving en masse.

The annual resurfacing of this kind of talk presents something of a problem for the industry: you’d be hard pressed to find many UK equity income fund managers advocating a hundred-day absence from the markets, unless they’re in the middle of a particularly ambitious renegotiation of their annual leave entitlement.

As ever, then, many are keen to point out that the wisdom of such ‘calendar effects’ is questionable at best. F&C says the average fall over the six ‘down’ summers seen over the past decade, 9.15%, roughly corresponds with the 9.67% average rise seen in the four ‘up’ summers.

It’s almost as if there’s no correlation between the time of the year and market fundamentals. The advocates of an end-of-year bounce followed by a sell-off in the first week of January were probably equally disappointed by the relative lack of volatility seen at the turn of the year.

But that’s not the half of it: there are a whole host of even more idiosyncratic calendar effects that have been dredged up by research papers over the years. The authors of a 2005 study suggesting that markets fell by an average of 0.4% the Monday after the start of daylight savings have probably hedged their bets well enough, but a rise of 0.06% in the FTSE 100 on 28 March this year didn’t exactly help strengthen this most tenuous of behavioural finance theories.

So, casting such impulses aside, what are the main factors impacting on major equity markets this summer? Markets have withstood a lot already this year – any pullback in risk appetite at this point is unlikely to come from an unthinking summer retrenchment, but rather as a result of a withdrawal of monetary stimulus.


"We would not be surprised to see some consolidation in markets as we enter the summer period. Indeed our view on growth is that momentum will subside as we progress into the second half," says Mike Turner, head of global strategy & asset allocation at Aberdeen Asset Management and manager of the Aberdeen Multi-Asset Fund.

Like many, Turner is particularly concerned with the planned end to US quantitative easing, which Federal Reserve chairman Ben Bernanke confirmed this week will take place as scheduled at the end of June.

"The market’s fascination with macro-economic data will also be a potential trouble spot for performance, especially if there’s recognition that the policy cycle is turning. A combination of less supportive policy, both fiscal and monetary, could provoke investor anxiety," Turner suggests.

John Ventre, manager of the Skandia Diversified Fund, is also sceptical on near-term prospects, citing demand destruction brought about by higher oil prices as well as the prospect of a US fiscal retrenchment that is more severe than the market is expecting.

Ventre is not wholly bearish. "More likely than not, equities will finish 2011 higher than they are now. However, I think that we will be better able to take advantage of the opportunities that these risks are likely to create over the coming months if we keep some powder dry", he suggests.

Still going up

How long can markets remain resilient in the face of macroeconomic and political headwinds? For some time yet, according to F&C’s director of global strategy, Ted Scott. "Why have markets been going up? The point is that the factors that have driven the current bull market are still intact and in many cases are improving," he says.

Among the reasons Scott points to are strong corporate earnings, attractive equity valuations relative to other asset classes, the gradual global economic recovery and the fact that monetary policy means "deflation has been all but defeated".

Scott’s colleague Jason Hollands, meanwhile, suggests investors should be more laid back, ignore short-term noise and broadly "do nothing" in the coming months.

Sitting on hands and re-embracing the increasingly unfashionable notion of long-term investing sounds like a tempting option at the start of a four day weekend. It also direct contrasts with those managers who believe that portfolio turnover is key to market navigation this year. Whichever option they choose, equity investors will be hoping this summer will be a glorious honeymoon and not just one big hangover.

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