The fifth month of 2022 is almost over. Yesterday the stock markets ended in Green, with Sensex and Nifty up close to 2%. However, during the 30-day-period ending May 31, the markets are down ~2.3%.
Have you heard the famous investing adage, “Sell in May and Go Away”?
What? You’ve heard this proverb for the first time.
The original saying is, “Sell in May and go away; come back on St. Leger’s Day.”
In the late 1700s, London traders would sell their shares in May, enjoy the summer and come back to the market after the St. Leger race in late September.
The saying became famous based on the historical underperformance of the stock markets during the six months from May to October.
The historical trend in Dow Jones suggests that the stock market returns would be low between May and October and high between November and April.
Is that the case with the Indian markets, too? Let’s find out.
Per our research, stock markets have been down in May only three times in the last ten years, including the pandemic year 2020. In fact, during the pandemic, the blue-chip index surged by 3.09% in May.
The graph implies that though the adage held for May 2022, the long-term trend shows otherwise. Except for the negative performance in 2002, 2003, and 2022, Nifty delivered positive returns between 2004 and 2021.
Interestingly, when we tracked the long-term performance, we learned that the Nifty grew ~232% from May 2012 to May 2022. It proves that despite the daily and monthly upheavals, you can create substantial wealth over the long term from equity investments.
Sectoral Indices Performance
Eight of 11 sectoral indices are down between -0.2 to -17%. The pack of Nifty Metal companies dragged the index -16.73% down, making it the worst-performing index, while Nifty Auto became the best performing index with a 2.98% gain in May.
What Are The Reasons Behind The Bleak Market Performance?
While several reasons have contributed to the weak market performance, a significant one is the sell-off by Foreign Portfolio Investors (FPIs). According to CDSL data that tracks FPI/FII investments in the Indian equity markets, foreign investors sold equities worth Rs. 39.13 thousand crores in May alone, making it the second-worst month. In the calendar year 2022, FPIs sold equities worth ~Rs. 1.66 lakh crores, three times more than their investments (Rs. 25.75 thousand crores) last year.
We attribute the continued FPI selling to relatively high valuations in India, surging bond yields in the US, weakening Rupee against the Dollar, rate hikes by central banks, and concerns of a possible recession prompted by aggressive policy tightening in the US.
Despite FPIs’ fierce sell-off, the stock markets have not crashed as they did in March 2020. The reason is simple, Domestic Institutional Investors (DII) and retail investors have emerged strong, offsetting the FPI pullout.
In the calendar year, DIIs have bought equities worth ~Rs. 1.82 lakh crores against the FIIs sell of ~Rs. 1.63 lakh crores.
Now you know why the markets have not ‘crashed’ but just corrected, which is natural.
Does this mean you must sell in May and Go Away?
A simple answer to this question is “NO.”
Sell and Go Away is a trader’s mentality; an investor must “Buy Now and Hold Forever*” (*Provided that you invest in stocks with sound fundamentals). The markets have corrected, and plenty of fundamentally sound businesses are available at discounted valuations. So, it’s your time to find such companies and invest in them. We can make it easy to pick the right stocks if you find them overwhelming. So, subscribe to our wealth advisory services and leap on your wealth creation journey.