North American markets are likely to be slow over the summer and follow one of the old adages of the investment business -- "sell in May and go away."
Historical evidence shows that markets traditionally have low returns between May and October but significantly higher returns in the November to April period.
Since 1950, for example, the S&P 500 has returned just over two per cent between May and October compared to an average of eight per cent during the November to April period, says Jane Gulian Moiroux, vice-president and national director of BMO Harris Private Banking.
A BMO Harris survey that found that the principal value of a $1,000 investment in the Dow Jones between May and October every year since 1950, without collecting any dividends, actually declined to $969 at the end of 60 years. However, if you invested $1,000 every year between November and April without collecting dividends and then sat on that cash, that same $1,000 would have grown to $22,900 during the same period.
"This suggests that virtually the entire return of the Dow Jones over the last 60 years can be explained (as taking place) between November and April," says Jack Ablin, chief investment officer for Harris Private Bank.
There are several reasons why this investment trend happens.
Some market sectors, such as gold, are simply seasonal in nature and may go flat during the summer.
In Canada, retail investors are usually focused on contributing to their Registered Retirement Savings Plans early in the year and then will spend some time building up their cash balances for investing activity later in the year, says Paul Taylor, chief investment officer for fundamental equities for BMO Asset Management, who predicts the same will hold true for this year.
"I think there is a good chance that the May to August 2012 period may usher in a consolidation phase for equities after a very sharp run-up in the October 2011 to March 2012 period, particularly in the U.S.," says Taylor.
There are several external factors that will result in a consolidation of equities over the next three to six months.
Uncertainty in the Eurozone caused by elections in France and Germany and financial pressures in Spain, slowing economic growth in China and concerns about the pace of recovery in the United States could all contribute to a slow period for equities.
"We have a little bit of a consolidation phase after a sharp run up, so the old adage of sell in May and go away is probably something for investors to be mindful of," says Taylor. "For the next three to five months there should be some sideways momentum as we consolidate the gains from the last three to six months. We're looking at a moderate upward trajectory in earnings ion the S&P TSX of somewhere between five and 10 per cent of earnings growth for the market as a whole."
He predicts the Canadian equity market will reach a little over the 13,000 mark by the end of the year, "a bit of upside from where we are."
"Commodity prices appear to be fairly valued at current levels but we might get a little bit of a modest upward bias in zinc, copper and nickel prices," Taylor believes. "The leading sectors here in Canada are health care first, consumer discretionary, then consumer staples and then financials while worst performing are materials and then telecom and energy."
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
