Investors who ignored the old market adage "sell in May and go away" this year will now be kicking themselves. And if the past is any guide, those still hoping for a turnaround may be feeling far worse a few months down the line.
According to market historian David Schwartz in the FT, the current downturn has probably not even reached the halfway mark. He notes that nasty slides during May and early June are symptomatic of significant downturns. There have been ten occasions since 1935 when the UK market has declined by more than 7% in the 30 trading days starting in May, and a "fully-fledged bear market" was running in each of those years, so this year's drop of 8% doesn't bode well.
So how far could the market fall? Again, historical precedent makes grim reading. Nine of the ten bear markets signalled by big drops in May and early June lowered the price of the average share by at least 27%, with the economic crises of 1937-40 and 1972-74 wiping 60% and 74% off the market respectively. Seven of the other eight lasted at least a year and eventually lowered prices by up to 51%. The only exception occurred in May to November 1979, where optimism over the election of Margaret Thatcher's government limited the slide to 23%. Given all this, selling in June and going away could prove a wise move in 2006.
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MoneyWeek expert James Ferguson disagrees. See his take on the stockmarket sell-off: Why you should ignore the bears. For more news and commentary, see our section on Investing in stockmarkets.
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