Will markets race higher after St. Leger Day?

“The world’s oldest ‘Classic’ race for three-year-old thoroughbred racehorses, the St Leger, has been run once more at Doncaster. Irish raider Galileo Storm won the race at odds of four to one but stock market investors may have been keeping an eye on the event for different reasons, given the old saying about ‘Sell in May, go away and come back again on St. Leger day,’”, says Russ Mould, AJ Bell Investment Director.

“This saying is based upon how, on average, the UK’s FTSE All-Share index has historically done best between January and April and then again after mid-September, with summer being a bit quiet by comparison. A similar, if less pronounced pattern, can be seen in America’s benchmark S&P 500 index.

“The UK’s FTSE All-Share just about bucked the trend with a small gain between 1 May and 8 September, the last day of trading before the St. Leger, but the America’s S&P 500 brushed it aside with a storming 14.7% gain, despite the turbulence caused by a stumble in high-flying tech stocks.

Source: Refinitiv data. Capital gains in local currency.

“Despite the overall averages, this pattern is not visible every year (investing would be far less difficult if it were). The FTSE All-Share has risen through to the end of April, dropped through to mid-September and then gained until the end of a year on just 15 occasions since 1965. The S&P 500 has followed this trajectory just eight times over the same period.

“The UK’s FTSE All-Share managed a small gain between 1 May and 8 September, but the America’s S&P 500 notched up a storming 14.4% gain, for its third-best summer over the 56 years of data studied here. 

“This begs the question of what those respective indices will do for the rest of the year (and then beyond), in the wake of a trends-busting summer on one side of the Pond and perfectly normal one on the other.

“The S&P 500 has actually gained ground on 34 occasions and lost it on just 17 between 1 May and Britain’s St. Leger day (an event that is unlikely to resonate Stateside anyway). 

“However, it has made a double-digit percentage gain just seven times. The good news for investors is – at least if history is any guide – the final third of the year saw further advances six times, against just one drop, and there were five gains against just two declines in the following calendar year. 

Source: Refinitiv data. Capital gains in local currency.

“Bears will point out that the two following-year declines came in 1981 and 1990, when a recession hit America. In this respect, much will therefore depend upon how the ongoing pandemic develops and how it affects upon the wider economy and corporate earnings and cash flow. Central banks’ and governments’ policy response will also continue to influence investor thinking.

“Sceptics will also growl that a longer-term time horizon offers a less favourable outlook, at least based on historic data.

“The compound annual growth rate (CAGR) in the S&P 500 over the past decade is 11.5% and it is 16.8% for the NASDAQ, levels which have historically preceded a decade of poor (or at least diminishing) returns, so perhaps would-be dip-buyers need to tread carefully after all, depending upon their time horizon.

“The past is no guarantee for the future, but this does at least offer a warning that it may be unwise to expect the next ten years to be a repeat of the last ten when it comes to stock market returns. It is also a reminder of the importance of valuation – the higher the multiple or price that investors pay to access the profits and cash flows of a given stock, basket of securities or even an entire index, the lower their investment returns are likely be. That’s just the iron laws of maths at work.”

Source: Refinitiv data