Summer Blues
Author: Cathy Dixon
We are all aware of the old adage that begins “sell in May and go away…” which is a reflection of the summer doldrums in the market. It is, without doubt, one of the most difficult times for trading in the market: with holidays being taken and low trading volumes generally, there can be some disproportionate movements and markets sometimes seem to make less sense. At first glance this summer appears to be fairly typical – there have certainly been big swings in the level of the FTSE 100 over the past couple of months. At the beginning of May the market stood at 5553, since when it has generally turned down, although it has been anything but a smooth ride. At the time of writing the market stands at a little over 5100, although it dipped down below 4900 towards the end of May and reached a low point for the year at the beginning of July (just under 4800). It has rebounded quite sharply off this level, however, and debate now centres on whether this is a bear market rally or the start of something more significant.
There have been slightly cautious noises from across the pond: there is a little more caution about growth and much attention is focussed on the results season which is now underway. At the end of last week three major companies reported better than expected earnings on worse than expected revenue (Bank of America, Citigroup and General Electric). This did nothing to help poor consumer sentiment which had already been hit by discouraging figures and Apple has also been hit hard with their latest highly publicised i-phone issues. In all, the plunge in the US stock market at the end of last week was unsurprising but nevertheless unwelcome. Probably the most important news that the markets are waiting for are the results of the stress tests relating to European banks, due to be announced on 23 July, which essentially measure the ability of the banks to withstand economic shocks. Senior bankers and regulators across Europe are worried that markets could misinterpret the outcome and react accordingly. The potential currency effect on equities if the euro falls in the currency markets could be highly significant.
Back to home territory. The new government is determined to have an impact and in the near term the repercussions of the emergency budget are still resounding and we have the spending review in October to look forward to as well. Uncertainty abounds. The impressive rally we have seen over the past couple of weeks was on the back of low volumes – not a promising sign – and follows a significant sell-off. As chartists debate the likely path of the market, investors are unlikely to be able to relax just yet: there are too many uncertainties ahead. There are always opportunities no matter how unclear the way ahead and the general message remains the same; in these days of low interest rates there are some very attractive yields on blue chip stocks in the equity market as well as long term growth potential, but the disconcerting volatility is likely to continue, anyway in the short term.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of Smith & Williamson Investment Management.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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