Investment | 7 August, 2017

Investing in summer: A threat or an opportunity?

Raúl Rendon Portfolio Manager

One of the frequent sayings on the stock markets is sell in May and go away, in allusion to the volatility on the equity markets in the summer period, a situation that begs us to ask if, in this period, the markets could undergo some kind of turbulence or volatility.

Taking the S&P500 from 1928 as our reference, the average yield in August, September and October is negative (between -0.1% and -1.6%) and less than half the times the market reports positive returns. In other words, the likelihood of corrections in the summer is statistically high and today, bearing in mind that the main US indices are at all-time highs, that prices are overstretched in some niche ideas and that some sentiment indices are suggesting complacency on the markets, it seems reasonable to assume that this summer could be accompanied by volatile movements on the equity markets.

It is true that some assets are still lagging behind, such as the European indices and some EM indices, which are far off their all-time highs, but considering that the US markets account for over 50% of global equity, it is likely that corrections on the S&P 500 could, in part, affect performances of other indices.

Is the glass half empty or half full?

The seasonality of the year is not an invitation to leave equity, but rather it is a period that begs prudence and advises possible modifications in portfolios, changing those leading assets for other with higher potential, due to the fact that their performances are lagging and/or simply raising cash levels and standing by for opportunities over the next six months.

It should be underlined that while the summer period is complex, we must also emphasise that, based on past data, the period spanning November to January is extremely positive, therefore we will need “fresh ammunition” to “shoot “ at will if a market correction does occur.

The core idea in this period is prudence in the short term, thinking of closing the year with high investment levels.