Stock Take

BIN LADEN EFFECT:Stocks rose on Monday morning following news of Osama Bin Laden's death, but quickly gave up their gains to end the day unchanged.

Why? One can’t argue that markets had priced in such an event – prediction markets show that traders believed the odds of bin Laden being captured before next September were a mere 3.8 per cent.

Markets do not move nearly as much as one might expect following seemingly major world events.

One study found that the SP 500 moved by just 1.46 per cent following 49 such events, not that much more than what is seen on “normal” news days (0.56 per cent).

Nevertheless, even that move dwarfs Monday’s apathetic reaction. The pithy reaction of Nobel economist Paul Krugman perhaps best captured the mood. “Good, and good riddance,” Krugman blogged. “But it’s hard to see how it changes anything important.”

A CLICK TOO FAR:One market adage – you don't need analysts in a bull market and you don't want them in a bear market – is incontestable. Just ask the UBS analyst who recently e-mailed his thoughts on the matter to a senior director.

“Without sounding presumptuous, I have added you to my distribution list. It’s mostly meaningless blurbs on what drives currencies, so please just treat it as entertainment – it’s easy to satisfy the handful of brain cells which occupy the sell-side banks’ salespeople.”

Unfortunately for the author, he accidentally sent the e-mail to everyone on his distribution list. Oops.

MAY SALE?Another adage, "Sell in May and go away", is well known. But is it a market myth or does it have historical basis? The latter, according to the annual Stock Trader's Almanac. Between 1950 and 2009, a $10,000 investment in the Dow Jones compounded to $527,388 between the months of November and April. Incredibly, that investment produced a $474 loss from May through October.

Data shows the trend to be even more evident in the Irish market. In the UK, this seasonal quirk stretches back to 1694, one study found.

Indeed, the same study found that the adage held true for 36 out of 37 countries studied, while Goldman Sachs’ Jim O’Neill this week agreed that post-war investors in the US, Canada, Japan and most of Europe would have “considerably enhanced” their returns by following such a strategy.

The most commonly proffered explanation is that fund managers holiday during the summer months, with lacklustre trading volumes leading to market stagnation.

However, the “sell in May” effect is also evident in countries in the southern hemisphere, which negates that idea.