Back in 2010 it happened around now.  In 2011 it was April and May.   This time last year investors got caught again. Perhaps the month of April needs to be included somewhere in the cliche “sell in May and go away”.

Is it a trend or just a coincidence? What are the chances of another sell-off occurring about now for the fourth consecutive year? Recent history might suggest it’s a fair bet, but then as Mark Twain noted, history doesn’t repeat itself but it does rhyme, so maybe investors will be safe.

For those investors basking in the tearaway start to 2013, it’s worth taking a look at what happened in 2010, 2011 and 2012. In all three years, shares burst out of the blocks early only to crash and burn around this time of the year. In 2010 shares started to fall in April and a few months later they were down around 15 per cent. In 2011, after some good gains in March, it all started to go pear-shaped again in April and May.  Stocks fell 20 per cent. In 2012 the sell-off wasn’t as severe but they still fell around 10 per cent.

The main drivers of the sell off won’t surprise anyone. There were fears of a slowdown in China, worries about Europe (mainly Greece, Italy and Spain), and weak economic numbers from the United States.

This year, those worries are still there but we also have the fact that valuations are more stretched than they were in those days.  The forward price-earnings ratio of the top 200 stocks around this time in 2010 and 2011 was around 11.5 times.  Around this time in 2012 it was 10.5 times. Now it’s around 14 times.

Notwithstanding this backdrop, could this year be the year where the ‘trend’ is broken?……..perhaps.

Firstly, we have central banks prepared to do ‘whatever it takes’ to sort out any issues. Investors are seeing the efforts and dollars that are being pumped into the financial systems around the world and saying shares are worth the risk.

Secondly, whilst 14 times is higher than the previous three years, they are not yet bordering on expensive. At 14 times, they are less than the long-term average of 14.5 times.

Finally, in the past, equity investors had somewhere to flee if they got nervous.  This year, however, the investment alternatives are somewhat limited.  Ten year bond yields have dropped markedly over the past few years. Back in April 2010 the benchmark Australian government bond was around 5.85 per cent. Many investors were still enjoying the war on term deposit rates and licking their wounds from the financial crisis. For them there was still a decent alternative to shares. Indeed, some central banks were still tightening monetary policy at this stage. For example, the Reserve Bank of Australia hiked the official cash rate in March, April and May 2010 by one quarter of a percentage point, taking it to 4.5 per cent from 3.75 per cent. The cash rate eventually peaked at 4.75 per cent in November 2010 and stayed there until November 2011. In April and May of 2011 the 10-year bond yield was still quite high at around 5.6 per cent. As a proxy for other asset classes it was still compelling value for many investors. Bond yields are now at 3.29 per cent as central banks have been getting really serious about printing money.  Shares with a decent dividend looked good last year.  They look even better this year.  Anyone chasing yield has nowhere else to go.

As always there’s a fair amount of human behaviour and psychology to investing that can push prices higher and lower at any time of the year.

Fingers crossed, any sell-off this year will be muted.

Bye for now

Dan’s Corner

_{Reference: The Australian Financial Review Published 12 April 2013}