We won't see a Wile E Coyote fall, says HAMISH MCRAE

Sell in May and go away. That’s the popular adage on Wall Street that has been around for at least a century, though its origins probably go back even earlier to share trading in Victorian London.

Well, we are not quite in May yet, but you don’t have to listen hard to catch the rumble of distant thunder warning of a sharp downward step in US share prices.

Several well-regarded American market strategists are predicting just that. One that caught my eye last week was Troy Gayeski at FS Investments, who reckons there will be a 22 per cent fall in the S&P500 and says don’t wait until May to get out.

That’s bold, forthright stuff, and he is not alone. But share prices on both sides of the Atlantic have remained reasonably solid in recent weeks, and that’s a clear reminder of another investment adage: that it takes two views to make a market. So what should we make of these warnings?

First, a general point. There does seem to be evidence that markets do better in winter than in the summer. Since 1945 the S&P500 has gained an average 6.7 per cent between November and April though only about 2 per cent between May and October. But it does not always work. In the most recent bear market the S&P500 peaked at the end of 2021 and had a vicious downward swing through May and into June before reaching its final bottom last October. It was right to buy in October, but selling in May was too late.

Feckless: Wile E Coyote was always getting himself into scrapes, like running off a cliff and plunging to earth, in his pursuit of his cartoon nemesis Road Runner

The timing worked rather better here, for last year the FTSE 100 index was trading in the 7,400-7,500 region in May before falling below 7,000 in early October. And since then we pushed through 8,000 to hit the all-time high. But this is just one year. As we all know there are no sure-fire rules that bring investment success. Now to the arguments about markets this year. One of those two views that make a market runs like this. Shares have not priced in the hit that earnings will take in the coming US recession. It is a Wile E Coyote market. You know the cartoon character, Wile E, runs over the cliff and keeps on running in mid-air; only when he looks down and sees there is nothing below him does he suddenly plunge to the (much lower) ground below.

The other view is that while the coming downturn will hit earnings a bit, it won’t be too serious and will be offset by the fall in inflation, which in any case will permit the Fed to cut interest rates. Markets are grown-ups and can look through the dip to growth beyond.

I incline towards the second view, largely because I expect the American consumer to keep spending and that will support corporate earnings. But we should all be aware that US investments are becoming less fashionable globally, the dollar is set to decline further, and that at present valuations, US equities are not a screaming buy. The S&P 500 is on a price/earnings ratio of around 22, while the Footsie is under 15.

So what does this mean for us in the UK? We have an unexciting year ahead, with the economy not doing as badly as the IMF forecasts, but with limited scope for much uplift.

As far as domestic demand is concerned, much depends on whether UK consumers will be prepared to run down savings to maintain their standard of living until inflation eases, and whether the housing market steadies.

For the Footsie members, however, what matters is what happens to the world economy, which generates roughly three-quarters of their earnings either through exports or through the profits of overseas subsidiaries. The outlook for the world economy is undeniably bumpy.

But at least the UK market offers value. You can buy the shares of large and successful enterprises at a reasonable price. That holds true whatever the Fed decides, however much the European Central Bank jacks up rates, whether or not UK interest rates have peaked – all the imponderables that market analysts ponder over.

And we seem to be moving to a climate which is paying more attention to tangible value rather than the intangible hope for growth.

So sell in May? Look, if investors feel really uncomfortable they should get on with it, whether it is April, May, June, whenever.

But unless you reject equities entirely you have to get back in, and re-entry is just as difficult to time as the exit. The original UK version of the saying runs that you should come back on St Leger’s day. For what it is worth, the 2023 St Leger, the final classic of the flat racing season, runs at Doncaster on September 16.