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Commentary on financial markets – May 2017

Highlights:

  • France: Emmanuel Macron becomes the new president
  • USA: Donald Trump under pressure from the media

Commentary:

Right at the beginning of January, the Czech government (un)submitted its resignation. The good news is that investors are not reacting to the government crisis (and the dancing around it). In fact, the Czech economy is in good shape, with GDP growing +2.9% year-on-year in the first quarter, while the consensus expectation was only +2.3%. Add to this the March balance of payments surplus of CZK +31.2bn against consensus estimates of CZK +20bn, and there is room for the koruna to appreciate more strongly.

The winner of the second round of the French presidential election was Emmanuel Macron, who defeated Marine Le Pen by 66% to 34%. This is the second European election this year in which the centre-right has won, after the Dutch election. This is viewed favourably by investors, who are mostly hoping for a continuation of this trend. In June there will be further elections in the UK and a general election in France. The election super year will then be rounded off by an important election in Germany in September. The outcome of all these elections will significantly influence the future direction of the EU.

Overseas stock markets have become nervous about the scandals surrounding President Trump. Donald Trump has reportedly asked ousted FBI Director James Comey to end the investigation into former White House National Security Adviser Michael Flynn’s relationship with Russia. James Comey wrote down a two-page detailed conversation for himself after that meeting at the White House. The White House denied the report and said the president of the United States never made a request to end the investigation process. The long-running scandal over Trump’s ties to Russia (through his associates) has cast uncertainty on the markets as to whether the new president will have the strength to push through the tax cuts or infrastructure investment expected by investors.

The bottom line is that May has been positive for equity markets and so far belies the well-known adage “Sell in May and go away”.

Investor School:

“Sell in May and go away” loosely translated means “Sell stocks in May and get out of the market”. This winged saying is based on historical data that measures average returns on the Dow Jones Index since 1950 in two periods: summer (May to October) and winter (November to April). While the average return on the index under review for the winter period is +7.5%, the summer period fares significantly worse with an average gain of just +0.3%.

It is important to note that these are averages and so the reality in each year could be very different from the long-term averages. Then, in the last ten years, the result is strongly influenced by the financial crisis that erupted in the autumn of 2008. In it, the stock market was losing money in the “winter” period, and so also significantly distorted the statistics. Nevertheless, it can be traced that over the last 10 years, the average returns in important stock markets have been worst in the months of January, June and August, as illustrated in the table.

For the long-term investor, the best strategy is to ignore the various sayings and instead pursue a long-term investment objective. This is because selling and rebuying investment positions means saddling performance with additional fees, making the overall result even worse. It is always true that fund investing should serve long-term goals and is not suitable for speculation! The most one can consider is the timing of a one-off investment where the above can be taken into account.

Have a great day!
Petr Šedivý

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