May to October has a poor reputation for UK investors. The image is well-deserved.
History teaches that shares rise just half of the time in mid-year over the long-run. A systematic mid-year investment earned investors less than one per cent per year, on average, in the last few decades. The best place to invest in mid-year was in a neighborhood building society.
But 2005 turned out to be a profitable exception to the rule. The stock market gained 11 per cent in the last six months even after subtracting the effects of October's painful sell-off. It makes the clear point that historical trends are guides, not guarantees. Exceptions to the rule are always possible.
We are now at the start of the so-called "good half" of the year. November to the end of April has a superb reputation among knowledgeable UK investors. Shares rose in 24 of the last 27 years during this half of the year.
These stats cause some investors to rub their hands in anticipation of what lies ahead. In fact, the FTSE-100 rallied by 104 points on October 31, one day before the official start of the November to April period. Did optimistic trend spotters trigger part of this rally by jumping into shares a bit early? No one knows with certainty of course but it is an interesting point of conjecture.
Which leads to our main theme. What clues does history provide us with about the next six months? Are the optimists on target or misguided?
If we rely solely upon top line figures, the evidence is remarkably one-sided. Most of the money earned by long-term investors has been earned in November to April. This trend has run for decades. From 1979 to the present, the average annual November to April profit was more than 11 per cent.
If the calculation was broadened to include a few additional years like 1974-75 when shares rose by 77 per cent November to April or 1976-77 when they rose by 51 per cent, the long-term trend would have been even more positive.
History also provides some important yellow flag warning signals as well, once you ferret beneath the top line figures. The most important warning of all is that superb November to April trading conditions in recent decades were a bull market phenomenon. Recall that one of the greatest bull markets in history ran throughout most of this period.
But a different story emerges if you focus solely on bear market years. There were 17 occasions in the last half-century when a bear market downturn was underway at the start of November. History teaches that price swings in the prior six-months did a fine job of predicting what would happen in November to April
There were five occasions when shares fell a great deal in the run-up to November, 15 per cent or more. They reversed direction and rose in November to April in four of those years. The single decline of this group occurred in 2002-03 and could be the exception that proves the rule. Shares had fallen almost 18 per cent from November to March 12. A powerful rally then clawed back almost all of those losses in the next six weeks. Prices ended April just two per cent below their November starting point.
At the other extreme, there were seven bear market occasions in the last half century when shares either rose in the six-month run-up to November, of fell by a small amount. They rose in November to April just once.
Neither of these two trends is conclusive but they make a clear point. In bear market years, big price drop in the run-up to November are typically followed by gains. A stronger performance in the run-up to November is typically followed by a decline.
As far as this year is concerned, shares rose more than 11 per cent in the last six months. It is a negative sign if October's decline signaled the start of a bear market downturn.
But if the bull run that began in 2003 is still intact, and October was merely a temporary bout of softness, be prepared for profits in the next six months.
Unfortunately, no one yet knows for sure where the underlying trend is heading. We will learn the answer to this important question in the next few months as future events unfold. For the present, we can only speculate....or turn to history for guidance. As last month's column observed, several historical trends hint the current bull market, assuming one is still in progress, is quite long-in-tooth and due for a reversal.
The bottom line. If you are confident that the bull market continues to run, then sit back and enjoy the ride for the next six months. History suggests solid profits are on the horizon. Conversely, if you believe bear market concerns are a credible threat, history warns that you invest in the next six months with caution.