Although the FTSE 100 has bounced back strongly from its March low, I worry that it may weaken further this summer before it recovers. Indeed, there’s an old expression from the London stock market, which goes: “Sell in May and go away, don’t come back until St Leger’s Day.”
This saying comes from the time when the rich would flee unsanitary London during the hot and humid summer months. With traders flocking to their countryside homes, market trading was thin and this led to price volatility. Normal service resumed in September, as cooler weather and London traders returned.
Sell the FTSE 100 in May and go away?
Yesterday, I warned that share prices (especially in the US), are ignoring economic reality and this could lead to weakening of the FTSE 100. What’s more, the summer months often see periods of pronounced price weakness.
Indeed, selling in May and walking away has been excellent advice so far this year. May itself was a marvellous month for investors, as the FTSE 100 soared more than a fifth (22%) to end the month at 6,077 points.
However, the FTSE 100 has shown weakness since peaking at 6,484 points on 5 June. As the temperature has risen, share prices have swooned. As I write, the FTSE 100 stands at 6,032, down over 450 points (7%) from its early-June peak.
The FTSE 100’s dog days?
The ‘Sell in May’ strategy has been subjected to statistical analysis that does indicate a persistent seasonal effect in many leading stock markets (including for the FTSE 100). Indeed, the period from November to April does indeed produce higher average returns from May to October.
Hence, with the UK in the grip of another heatwave and Covid-19 far from beaten, don’t be surprised to see the FTSE 100 to ‘fall before the Fall’. What’s more, Mr Market still has these six worries to contend with:
- Further and extended outbreaks of Covid-19 (notably in Southern US states)
- Progress on Covid-19 treatments and vaccines
- Troubled US-China trade talks
- The presidential election on 3 November
- The shape of any economic recovery
- A no-deal Brexit on 31 December
This super share has shrugged off the virus
Although the FTSE 100 may weaken further, I see value in many mega-cap, financially strong firms. For example, I’m a big fan of Anglo-Australian miner BHP Group (LSE: BHP), whose share price is showing strength since bouncing back from its March low.
As I write, BHP shares are 1,764p, down just 0.2% over the past 12 months. Also, BHP shares are just 5.8% below their 52-week high of 1,873p, set on 17 January. For grateful BHP shareholders, it’s like the spring market crash never happened.
Since collapsing to 940p on 12 March, BHP shares have almost doubled, soaring 87.7% from this low point. They were a once-in-a-lifetime steal at 940p, but remain a bargain today, in my view.
I am drawn to this FTSE 100 share for the usual value indicators. BHP shares trade on a price-to-earnings ratio of 12.3 and an earnings yield of 8.1%. They offer a dividend yield of 6.4% a year, covered 1.27 times by earnings.
Finally, with a market value of £101.7bn, BHP is a FTSE 100 behemoth – plus it has balance-sheet strength to match its sheer size. For these reasons, I’d buy and hold this FTSE 100 share for cash dividends and long-term capital growth.
