As we head towards the summer season, the old investment adage of "sell in May and go away" is being explored once again. Over the last 25 years, the UK FTSE All Share has made an average gain of 10% each year between November and April, while from May to October the index has made an average loss of 0.1% each year.

However, data has shown that the suggestion only works about 50% of the time. Last year the FTSE 100 continued its recovery through the summer period and there is a view that the factors that provided the impetus last year, such as growing corporate earnings, attractive valuations and strong merger and acquisition activity, are still in place to stimulate the market this year.

The FTSE 100 is now less than 1,000 from the all-time high of 6,930 it reached in December 1999, while the FTSE 250 index has already reached new ground. Last week it broke through 10,000 before retreating back to 9,879. While there is concern in some quarters that growth in the global economy may slow, in the UK's favour is that its equity markets have significant exposure to pharmaceuticals, banks, oil and mining stocks, which investors may seek out if growth in the global economy does falter.

Following a surprise rise in Chinese interest rates, the FTSE 100 closed down last week, but still managed to stay above 6,000. Over the last year the index is up 25.8%, while over three years it has risen 55.6%.

Meanwhile, Asian stocks have hit their highest levels for 17 years following some strong corporate earnings results. The Morgan Stanley Capital International Asia-Pacific Index, which tracks more than 1,000 stocks in the region, has risen to 139.22, its highest level since 24 February 1989, while Japan's Nikkei 225 stock index rose back above 17,000 to 17,153.77. In the US, the Dow Jones Industrial Average is less than 400 from its previous high.

Turning to oil, the price of a barrel of crude continues to rise over concern that supplies from Iran, the world's fourth largest producer, will be disrupted because of a stand off over the country's nuclear industry development. Crude oil for June delivery rose to USD74.20 per barrel.

Looking forward, there appears to be some commentator consensus that the price of oil may rise further in the short term due to continuing uncertainty about potential disruption in supplies. However, the duration of such a rise may be limited with prices weakening in the longer term.

Fund management group Miton Optimal have this to say about the coming quarter;

“The second quarter of the year should continue in a similar fashion to the first quarter with no nasty surprises anticipated, reported earnings not disappointing despite the over quoted ‘sell in May and go away’. It will be interesting to see if M&A activity continues at the same pace, but with private equity funds awash with money, any reasonably valued companies with good free cash flow could find themselves a target.

The main message which we started the year with and adhere to, is that the second half will see a slow down as higher energy prices and interest rates take their toll on household spend and little has appeared to contradict this theory. This in turn could lead to a slowdown in global GDP, largely being driven by the big engine the US economy spluttering on the back of a flat to falling housing market and a slowdown in consumer spending. Other areas such as Europe appear more immune but it will be interesting to see the effects of perhaps another 50bp interest rate increase on their benign recovery. Even the UK at present in our opinion looks uninspiring, with signs of tiredness after a 3 year bull phase. Oil prices are expected to remain around USD60 per barrel for the forseeable future a feature that is in the short term inflationary, but ultimately deflationary through its drag on economic growth. Our belief is that whilst the mature Western equity markets could continue to rise in the short term they could just yet be hit by the unusual combination of rising rates through commodity driven inflationary worries and declining economic growth (stagflation) which typically is broadly poor for equities. The dynamics of Asia are different where we find much more reason to be optimistic and it could be growth from this region that comes to the rescue of the US and Europe. Japan in particular is at a different stage in the economic cycle as it emerges from 15 years of deflation and the domestic economy is becoming increasingly (but not completely) immune to US consumption. It’s almost a waiting game to see what scenarios pan out, so we feel it appropriate to hold above average cash and resource weightings in the portfolio at the moment”

Turning to currencies, the US current account deficit of USD800 billion is being cited by analysts as the catalyst for a substantial fall in the dollar against the leading currencies. Interest rate influences, such as China's unexpected rate increase and Fed Chairman, Ben Bernanke's hint that US rate rises may pause, are also putting pressure on the dollar. The euro has already risen to an 11-month high of more than USD1.26, while against the yen the dollar is at a three-month low of Y113.70 and sterling has risen back above USD1.80.

While equity and other asset valuations generally continue to advance with commodity prices driving index levels, investor attention is focused on the anticipation of the point at which further growth will be constrained by the effects of inflation of input prices and/ or a fall in activity. This pre-occupation continues to be a challenge and a significant hurdle to action.

Other Articles:

Australia - A Safety Zone - January 2012 (01/05/2012)
April 2011 (04/11/2011)
John Mauldin - Stay out of the ROOM (03/07/2011)
March 2011 (03/07/2011)
STRATFOR's 2011 Annual Forecast - Outside the Box Special Edition (01/20/2011)
Thinking the Unthinkable - John Mauldin's Weekly E-Letter (01/16/2011)
January 2011 (01/03/2011)
Pushing on a String - John Mauldin's Weekly E-Letter (09/26/2010)
Market Still Deluding Itself That It Can Escape The Inevitable Dénouement - John Mauldin's Outside (09/13/2010)
The Dark Side of Deficits - John Mauldin's Weekly E-Letter (08/30/2010)
Thoughts from the Frontline Weekly Newsletter How We Get Through This Mess by John Mauldi (08/22/2010)
The Ultimate Hedge in Economic Crisis - John Mauldin's Outside the Box E-Letter (06/02/2010)
Six Impossible Things - John Mauldin's Weekly E-Letter (05/31/2010)
The Case for a Fed Rate Hike - John Mauldin's Weekly E-Letter (05/24/2010)
Learning from the Bank of Dad - John Mauldin's Outside the Box E-Letter (05/24/2010)

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