It might be a stretch to say that this summer’s market rally owed everything to the actions of European politicians fixing the region’s economic woes – there’s still a bit more work to do there. Nevertheless, a rally of sorts is what we got, which was great news for those bulls that emptied their wallets when the FTSE 100 bottomed at the end of May.
Anyone with a passing interest in calendar effects will be interested to note that the market hit a six-month high of 5,916 in the days following this year’s St Ledger Festival at Doncaster in early September. So bears betting on a ‘Sell in May’ strategy this year have endured the same luck as those punters that lost their money backing Camelot to win this year’s Triple Crown.
At the risk of flogging calendar events even further, we’re now approaching a time of the year that has historically been claimed to offer the best returns for stock market investors, namely November to April. While no-one really knows why this should be, the coming six month period has historically beaten May to October returns by 10 percent per year on average – an anomaly known as the ‘Hallowe’en Effect’. It’s an anomaly that has been witnessed across all 37 countries studied (Bouman and Jacobsen (2002) and Andrade, Chhaochharia and Fuerst (2012)).
It also coincides with the end of the Presidential Election year (which has always been good for stocks) and the launching by the US Fed of QE3. While the latest round of widely-expected financial stimulation may to an extent be already priced-in to the market, these factors are unlikely to hurt equities in the short term.
Positioning for a continuation of the rally?
So what’s been the story in the markets over the summer and what can we expect to continue? Well, the answer seems to be that a mixture of value and dividend strategies have been the main beneficiaries of the risk-on rally to date. All of our income investing screens are in positive territory so far in 2012, which chimes with a general trend in favour of dividends. Indeed this year has been such a boon for dividend stocks that anyone pursuing the sell in May option would have foregone four months of dividend income, exacerbating their losses.
Our top four performing investing screens have delivered…