Record Pace Buy in May, Don’t Go Away

There’s a well-known adage in stock-market circles that you should always "sell in May and go away." Somebody should remind Germany’s DAX index, which is surging from record to record.
The cherry blossoms are out in the financial capital Frankfurt, but there's a rain in the forecast, too.

Investors had to wait almost exactly two years for the index of Germany's 30 leading shares to reach a new all-time high. Ever since the moment finally arrived last month, the blue-chip DAX hasn’t looked back.

Germany’s DAX index has been going from strength to strength – or record to record – over the past week. It’s up by nearly a quarter over the past six months and continued reaching new heights on Friday, for the first time topping 12,700 just before closing Friday afternoon in Frankfurt.

Could the surge be headed for a flop? After all, one look at the calendar may remind many investors of the old saying "Sell in May and go away."

There is a grain of truth to this: Investors are often advised to turn their backs on the stock market at this time of year and wait until late summer or, even better, autumn before returning. While more recent data suggests the old adage is no longer as relevant as it once was, investors continue to ask themselves year after year whether May means it's time to take stock of their profits.

However, many professional investors are sounding the all-clear this time around – particularly when it comes to the DAX.

As long as no political horror scenarios occur in May, 'sell in May and go away' does not seem to be applicable this time. Robert Greil, Merck Finck

Robert Greil, chief strategist at private bank Merck Finck, is among those who doesn’t believe May will live up to its reputation as a dangerous month for the equity markets this year. "As long as no political horror scenarios occur in May, like a [French] election victory for Le Pen, 'Sell in May and go away' does not seem to be applicable this time, based on data trends," he said.

Mr. Greil is, of course, referring to the second round of the French presidential elections taking place on Sunday, an event being watched closely by investors. The independent left-liberal candidate Emmanuel Macron leads by about 20 percentage points in the latest surveys over the candidate of the far-right Front National party, Marine Le Pen.

That doesn’t mean stock markets, which favor the pro-European Macron, are treating it as a foregone conclusion. "Even though the outcome is supposedly foreseeable, the run-off in France will be the top event for the stock markets next week," Mr. Greil said. If Mr. Macron wins, there are some who believe the DAX could crack 13,000 points. If things do not go as expected – if the polls turn out to be wrong, as has happened with plenty of other elections in the last year – then "Sell in May" could still turn out to be a very good piece of advice.

However, very few people are currently anticipating that outcome, as the latest developments in the DAX show. In fact, it was the first-round result in France that triggered the DAX’s record in the first place. “Global stock markets are rising, now that the first round of the French election has reduced the perceived political risk,” Richard Turnill, the global chief investment strategist with asset manager BlackRock told Handelsblatt.

Expectations are now high that global growth will not be curbed any longer by political uncertainties in Europe. A Sentix survey of more than a thousand investors published this week found that only 13.6 percent of them expect a breakup of the euro zone in the next 12 months, down from 18.7 percent just one month ago.

There are other reasons aside from politics to be optimistic. Lars Edler, co-CIO at German private bank Sal. Oppenheim, sees opportunities in rising corporate profits and stronger growth in the euro zone. If the European Central Bank manages the wind down of its phase of extremely low interest rates successfully, this could also provide a boost in the coming months. "We think it is entirely possible that Europe could come out of this year stronger than when it went in," he said.

But not everyone believes the May curse is really a thing of the past. "After the first four months were unusually calm on the stock markets, the markets should be prepared for the summer months to be much more unsettled," said Tilmann Galler, a portfolio manager at JP Morgan Asset Management.

For one thing, other populist movements and geopolitical tensions such as those in North Korea and Syria could also pose a threat to the stock markets though the biggest risk could be closer to home: Germany’s neighbor Italy is “currently the number one trouble spot for the financial markets," warned Mr. Edler.

The economic data outside of Europe is also a little more mixed than the optimists would have it. Mr. Galler expects to see more of a mixed picture over the next few weeks. Slightly above-average valuations of shares leave little room for disappointment, while weaker-than-expected US growth and slackening momentum in China “could represent the biggest risks in the next few months," he said.

That doesn’t mean investors should sell everything, either. Mr. Galler said shares still have the potential for high single-digit returns over the next 12 months, despite the short-term risks and the advanced stage in the business cycle. "For investors, that definitely means holding on to their investments," he said.

And what about that May adage, anyway. Is there any real truth to it?  Lars Edler is skeptical. "A superficial analysis actually shows an outperformance since 1970 if you didn't hold investments in August and September," he said, though he admits much of the positive performance was concentrated in the late 1990s and early 2000s. "There is no statistical proof that the strategy works," he said.

Tilmann Galler isn’t convinced either. Summer is more about a lack of activity on trading floors than a downturn, he says: "It's not just the bulls that disappear on their summer vacation, but the bears too."

In any case, it’s better to focus on long-term trends than on superstitions, says Michael Wiaterek, head of asset allocation at Commerzbank: "Myths are no substitute for a well-founded strategy.”


Jessica Schwarzer covers financial markets for Handelsblatt in Frankfurt. Katharina Schneider is a correspondent in the finance section of Handelsblatt based in Frankfurt. Christopher Cermak of Handelsblatt Global contributed to this story. To contact the author: [email protected] and [email protected]