“Sell in May and go away” is an old saying when it comes to the stock market’s seasonality. The market would make most of its gains between November and April and then experience most of its corrections, bear market losses and crashes between May and October. This strategy suggests that investors should be in shares during November through April and in cash during May through October. How well do calendar-based anomalies, such as the “Christmas Rally” and the “Sell-in-May” effect, hold up?

Researchers have found that a “Sell-in-May” strategy beats the market more than 80% of the time over 5-year horizons. The evidence from an extremely long UK data set indicates that some calendar-based anomalies are persistent and others are not. The “Sell-in-May” effect is among the most persistent. Sceptical children can doubt whether there is a Father Christmas but for stock-market statisticians, there is not much debate: The year-end lift known as the Christmas Rally is no myth. The stock market typically posts modest, but reliable, gains in late December into the beginning of early January. Over the last five years, the JSE All Share Index has posted gains of 4.04% on average for the month of the December, while January’s performance, on the other, is more dismal, slipping on average by 1.79%. The combined performance for the December/ January period is a 2.33% average.

Do not get me wrong. I do not believe in mindless cyclical and seasonable patterns. As a rational investor, you must always ask yourself, “Why does this happen?” To better understand what drives the Christmas market rally, let us look at the variety of positive factors for the share market that usually come together around this time of the year. The Christmas holidays are the strongest retail season of the year, giving a boost to the economy. Inflation is under control and interest rates are at 30-year lows, while company earnings are starting to pick up. Year-end investment reports also tend to offer upbeat outlooks for the coming year, and often plug hot share picks just as investors are repositioning their share portfolios. And since lots of investors are already in a good mood at this time of year anyway, more people tend to be buying rather than selling around the holidays. What is not to like?

It is pretty much like clockwork and when it does not happen, it can be a very helpful warning of impending trouble. Even those investors who are not interested in buying shares during the Christmas holiday season would do well to keep an eye on the market. In years when there has not been enough enthusiasm for a Christmas market rally, it has often been a sign that turmoil lies ahead. In December 2007, for example, when there was no Christmas market rally (the JSE All Share Index slipped by 1.78%), the market tanked 47% lower in 2008.  But on the other hand, the JSE All Share Index also slipped 1.50% lower between December 2006 and January 2007 and 2007 turned out relatively okay, despite a 15% correction in July.

A common myth in financial circles is that the consumer drives the economy but in fact, it is business, not consumer spending, that is the heart of the economy. When businesses produce profitably, they create income-paying jobs, and thus consumers spend. Although low interest rates were meant to drive a consumer recovery, it has failed to materialize. Unemployment is fuelling the negative sentiment and individuals may be better off thanks to the low interest rate environment but they are still clearly worried about the future, and so are paying off debt instead of spending.   South African exporters are feeling the pinch with the strong Rand eating into profits, but importers on the other hand, are smiling. The JSE General Retail Index, for example, has gained 156% since its March 2009 low, compared to the JSE All Share’s increase of just 75% over the same period.

One example is the company called JD Group, a mass consumer financier and South Africa’s leading differentiated furniture, appliances, electronic goods, home entertainment and office automation retailer. It operates in southern Africa through four business divisions and 10 brands, which include Bradlows, Joshua Doore, Morkels, Russels, Hi-Fi Corporation and Incredible Connection. JD Group has a diverse product offering that spans both credit and cash retailing which, which coupled with a more prudent and efficient financial services division, should benefit the group going forward. In the short to medium term, the group is likely to produce above average growth coming from the previous low base. However, debt management remains crucial in the period ahead. Trading on a P/NAV ratio of 1.8 times, we feel the share is fairly valued, especially compared to its listed peers, and would recommend investors to hold their shares at this stage.

While some market experts may take a dim view of market trends based on the calendar, the Christmas market rally still has plenty of believers. With interest rates at low levels, business spending and capital investment should slowly accelerate and that bodes well for the consumer, the economy and the stock market in 2011.