On the Money

Beware experts on when to buy and sell

Alan SteelNo doubt as an investor you’re familiar with the old saying “Sell in May and Go Away, Don’t Come Back till St Leger Day”. Something to do with harvests and horse racing apparently, though I’ve never quite understood why.

Lots of nonsense is spoken by repeated generations of commentators and experts. “Deficits are bad for stock markets” is another classic we continually hear. So surpluses are good then? Let’s apply the “Nullius in Verba” test. Roughly translated as dinnae take their word for it. Check for yourself.

Last time I looked at recent history of surpluses and deficits it was a real eye opener.  I was born in late February 1947 , the worst winter in 100 years for other reasons…a double depression I learned much later when I studied climatology at University.

Since then, until 2008 when I last studied the numbers in detail, there’s been nine times when the US economy peaked in Fiscal Surpluses, and nine when it experienced maximum Fiscal Deficits.

A study of the performance of the US stock market following such peaks and troughs …taking three year cumulative total returns of the S&P 500… must be a shock for the “deficits are bad” brigade. The average three year cumulative return of the Index following peak surpluses is only + 9.2%, with the worst three year return being after 1999, a loss of 40.1%.

On the other hand following maximum deficits the average three year cumulative return of the Index is +35.9%, the best occurred after 2003 at +37.6%. So actually running deficits on that evidence produces equity returns almost four times better.

So when you read that this or that is good or bad for stock markets don’t just accept it as gospel. My favourite explanation for the movements in stock market indices was a US market commentator who announced: “On stocks today, news of higher interest rates sent the market lower. However ,on the expectation these rates could stifle inflationary pressures, it pushed the market higher. But when experts considered that higher rates could cause stagflation instead, the market fell again.”  Cracker.

So what’s the sudden interest in stock market movements? Well, on Tuesday it was the Riding of the Linlithgow Marches. What’s that about? I hear you ask. The Marches refers to the rights conveyed back in 1138 when Linlithgow was granted status as a Royal Burgh. Once a year since 1541 for some reason or other (no idea why 400 years was ignored) the “burghers” of the town are invited to check the boundaries (the marches in old Scots), fortified by a fair skelp of beer and whisky. The enjoyment of such beverages begins at five in the morning (not lazy burghers then) and goes on all day.

Not only is it on a Tuesday, but by law it’s the first Tuesday after the second Thursday in June. And you think investment is complicated?

Experience over the years led us to close our office for the day, for “health and safety” reasons. As luck would have it  the UK FTSE 100 decided to fall two per cent that day. According to a quoted political correspondent that was a “meltdown” and wiped £30 billion off the market. Why? Because of Brexit fears, she decided.  But it triggered a couple of urgent requests from experienced personal finance journalists for “advice” on how to move to safer investments. And here was me safely oblivious to the panic.

I was speaking to an old client on Friday morning about this and he explained the FTSE had just gone up by one and a half per cent as a result of the murder on Thursday of a Labour MP. That’s what he’d heard on the radio announced by a market commentator. So is that why the Dow Jones Index went up late yesterday too, I asked? I guess so, he replied.

Please remember two things. One day up or down movements of stock markets, even if they can be linked to any an emotional reaction to one single event, like the Japanese Tsunami some years ago, bear no relationship to whether you as a long term investor should join in the resultant chaos.

And, secondly, take with a pinch of salt those “experts” who encourage you to track an Index like the FTSE which are overweight, over-expensive, underachieving companies.  Whether Brexit happens or not, emotions have distorted share prices here and there. World class businesses in or out the UK will keep doing what they’re good at, returning growth and rising dividends to those of us who prefer to listen to the Terry Smiths, Sebastian Lyons and Neil Woodfords of this world rather than newscasters thinking up excuses on the spot.

Happy Marches !

Alan Steel is chairman of Alan Steel Asset Management

Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.


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