After summer the stock market tends to burst back into life in September. Unfortunately, the renewed activity in shares tends to be on the downside. Since 1984, the FTSE 100 index has an average return of -1.2% in this month; this gives September the worst record for shares for any month of the year. Whilst past calendar month performance should not be seen as an indicator of future performance, all investors would do well to remember that experienced investors are aware of seasonal patterns in the market. These market veterans are not likely to “fight the tape” should a seasonal pattern begin to prevail.
“Leave me alone, for August’s sleepy charm is on me, and I will not break the spell”. So wrote legendary author and poet Edith Nesbit, but this sentiment is not so far from the general attitude seen on many trading desks. We are not, of course, referring to our own industrious colleagues. In the markets, rumblings of trade tariffs are rattling investor confidence, with equities regularly giving up their hard-won gains. It is very much the case for investors this year of one step forwards, two steps back.
Please find some complementary research on the Regional REIT 4.5% 06/08/2024 bond.
Regional REIT Limited (“RGL”) is an investment trust listed on the LSE with a NAV of £393m that invests and manages high quality commercial properties predominantly in principal UK regions, outside of London.
We believe this bond offers a safe and simple investment. The interest is covered 3.8 times by the company’s earnings, pretty safe-looking from a bond holder’s perspective.
This makes a timely replacement for holders of the CLS 5.5% 31/12/19, which is being redeemed early on 31st July at a price of around 105%. Holders could therefore buy this new bond at a 105/100 ratio (a holding of 30,000 CLS 5.5% could be replaced with a subscription of 31,500 Regional REIT 4.5%).
The offer period closes on the 1st of August so please submit any order before then. With a coupon of 4.5%, we believe the bond represents good value and may well trade at a modest premium in the secondary market.
The old stock market adage, “Sell in May and go away” continues, “don’t come back till St Leger Day”. However, analysis of the historic data shows that the worst returns over this period occur in May and June. After June, returns up to St Leger Day (in September) tend to be quite flat. In fact, after traditional weakness in June, prices quite often bounce back in July – making this month a small island of strength in an otherwise weak six-month period.
With major indices within touching distance of all-time highs, we sense that investor unease is rising. Articles about the seasonal “sell in May and go away” phenomenon litter the financial press whilst heightened political issues in Italy and Spain, renewed trade tensions and continued Brexit uncertainty are all ingredients that make for a long and nervy summer. Whilst selling has been limited since the first quarter of the year, there is still plenty to worry the bulls. Though we see few signs of an imminent bear market/recession, there are plenty of catalysts for a 5%-10% pullback, though not enough to advise selling.
The second quarter of the year has begun in positive fashion following the sharp sell-off seen in Q1 with major global equity markets now in positive territory year-to-date, and within touching distance of their January highs. Investor confidence is being rebuilt and sanity has returned to the marketplace. Interest rate rises in the US have now been priced into market expectations and the 3% US Treasury bond yield level, which so phased investors last quarter, is no longer viewed with the same degree of foreboding. Indeed, rates can be said to be currently in a “Goldilocks” phase; not too high to discourage business activity, but just high enough to provide rising income to investors. That includes retirees, whose higher income can infuse further growth into consumer spending.
After a spectacular January rally, a brutal 10% correction, a 60% retracement and a subsequent retracement of the retracement, US equities are back to where they were five months ago. Investors may be tempted to paraphrase Shakespeare and treat market gyrations as “a tale full of sound and fury, signifying nothing.” However, this would be to dismiss the return of volatility which has been the key market feature since the last week of January. This has certainly impacted negatively on investor confidence and eliminated the greed factor prevalent at the turn of the year. However, it is equally clear that fear has not yet returned to any meaningful extent and that a tentative rebuilding of confidence can be established now that the first quarter is finally behind us.
Investors will be happy to put February in the rear view mirror. More than the actual decline, investors will take away the stomach-churning memory of the free fall early in the month, where the S&P 500 lost nearly 11% from its late January peak to the end of the first week of February. The bigger casualty in February was investor confidence in the market’s upward course. Of course, markets occasionally need a healthy corrective. They function best when greed and fear are in healthy balance, or at least have reached an uneasy truce. By the end of 2017, fear was banished, while greed was rampant. If the price of February selling has been restoration of this balance, the trading year may be better for it.
Last week the Dow Jones fell 665 points to end the day down more than 2.5% and falling below 26,000, the record level it hit on 17th January. It was the first time since June 2016 that the Dow had fallen more than 500 points. This is certainly bringing edgier conditions to the market than investors have grown accustomed to. We do not though see this as the start of a bear market. Indeed, the fall was largely due to fears of rising interest rates caused by great jobs data. And historically, 1% falls in the S&P 500 after such extended periods of calm markets have seen the stock market rise on average 7.2% six months later and 17% twelve months later. We are of the view that this is merely a short-term consolidation and one more trick of the bull market to force you to believe that the bull market might be over. That is not the case; the secular bull market should continue to climb the wall of worry.
We wish all our clients a very Happy New Year and all the best for 2018. For stock market investors, 2017 will be remembered as a remarkable year with the all-important US economy posting another year of growth, making this recovery the third-longest in the post-WWII era. Stock markets finished the year at or close to multi-year highs with progress on US tax reforms and Brexit negotiations providing positive catalysts to risk assets. Looking ahead, we see a favourable backdrop of strong economic growth, increasingly supportive fiscal and regulatory policy and tightening but still easy monetary policy