The stock market rebound we’ve seen over the last month has been pretty rapid. Having dropped briefly below 5,000 on 23 March, the FTSE 100 is now getting close to the 6,000 level. That’s a gain of around 20% in one month.
Is the market rebound happening too fast? I think it’s possible. After all, we don’t even know when lockdown will end yet.
With an uncertain summer ahead of us, the old stock market adage that you should sell in May and not return until the St Leger Day races in September might seem apt. But new research suggests this approach is pretty risky.
Today I want to take a look at the facts, and explain why I won’t be selling anything in May.
Sell in May? You could miss the rebound
After a crazy few months, I understand that it might be tempting to stay out of the market until normality returns. But new research suggests that selling in May is a pretty risky strategy in any year. According to data from Willis Owen, the FTSE 100 actually rose during the summer in 17 of the last 34 years.
In other words, selling in May has a 50:50 success rate. It’s the same as flipping a coin.
If you include the impact of dividends, selling in May looks even worse. FTSE 100 investors who reinvested their dividends enjoyed gains in 22 of the last 34 years. That sounds like a good argument for staying invested to me.
In decades gone by, the City might well have gone to sleep in the summer. But today’s City is a fast-paced environment that rarely slows down for anything. If you sell in May, I think there’s a real chance you could miss the next stage of the stock market rebound.
How to profit from the stock market rebound
Is the market rebound we’ve seen over the last five weeks the first sign of a real recovery? At this point, it’s too soon to say. But I’m pretty sure that careful buyers should be able to find some real bargains in the current market.
Over the next six months, we should see companies start to trade normally again. As financial results and updated broker forecasts become available, we’ll learn about the real state of the economy.
This could cause another mini crash. Or it might trigger a fresh round of buying.
The problem is that the real stock market rebound won’t wait for anyone. Big share price gains typically happen on just a few days each year. If you miss these, you could badly underperform the market.
That’s why I think the best way to profit from the market rebound is to stay invested right now.
Play the long game
Jumping in and out of the market is only guaranteed to make one person rich – your broker.
When you buy shares, you become the part owner of a company. There will always be some bumps in the road. But if you sit tight and keep your eye on the big picture, you’ll be in the right place to enjoy a recovery.
In my view, there’s no good reason to sell in May. Over the long term, I think you’re much more likely to make money by holding onto your stocks – and perhaps buying some more in May.