Several leading commentators are concerned about stock market conditions in the next few months. Interest rates, high oil prices, US budget and trade deficits, the state of the Chinese economy are some of the issues causing concern.
A second issue worth thinking about is the old stock market saw advising us to "Sell In May and Go Away...".
History teaches that Sell In May is a useful rule of thumb for long-term investors. During the last four decades, investors gained almost 10 per cent in the average year by steadily holding shares from November to April. But they lost money in the typical year by systematically investing in May to October.
Sell In May is not a perfect system to follow. Shortcomings appear once stock market returns are examined on a year-by-year basis. Investors may have lost money over the long-run with a May to October investment but shares rose 12 times and fell 12 times during this period since 1981.
As far as 2005 is concerned, broad economic fears, coupled with uncertainties surrounding the up-coming election are causing many investors to fear for the worst during the next six months. Although no one knows with certainty what lies ahead, history provides an interesting perspective.
During the last few decades, price swings in the first four months of the year dis a fine job of forecasting the direction of the May to November trend.
There were nine occasions since 1981 when shares shifted moderately in January to April within a range of -0.1 per cent to +6.7 per cent. Prices rose in May to November in each of those nine years.
The 15 years remaining years of this period saw January to April price shifts outside of the target range. It proved to be a worrying omen. Shares fell in May to November just 12 times. Furthermore, each of the three exceptions to the rule were small six-month gains of no more than three per cent.
The FTSE-All Shares index ended 2004 at 2410.75. Shares currently sit about three per cent above their start-of-year level with three weeks to go until month-end. It makes good sense to monitor the All Shares index at the end of April. If its end-April reading is within a range of 2408 to 2572, history hints that prospects for the next six months might be more promising than some experts believe.
Regardless of where shares stand at the end of April, it is important to treat historical relationships like this as guides, not guarantees. There is nothing like an important event on the domestic or world stage to throw any trend off-course, even a robust trend like this one.