The common saying on the markets of “sell in May and go away” originally ended with “come back on St. Leger's day.”
The St. Leger Stakes, which run annually in September, is the last thoroughbred horse race of the British racing calendar as well as the last leg of the Triple Crown. Traditional belief is that once the racing season was over, everyone could return to the business of buying stocks and shares.
Historical records show that U.S. stocks tend to underperform from May to October, possibly due to the holiday season. Breaking the historical trend, July 2015, has recorded the second best monthly performance of the year with the S&P 500 index (SPX) up by 2.2% and the Nasdaq Composite Index (COMP) by almost 3%.
Looking at other markets, the month of July was brutal with China leading the way in the worst market performance in many years. The poor Chinese performance has affected a number of emerging markets while commodity prices have suffered to a large degree as a result of poor demand coming from China.
The Shanghai Composite index (SHCOMP, - 2.68%) ended July with a drop of 14%, to record the worst monthly performance since August 2009. The biggest daily loss in over eight years was recorded on Monday July 27 when Chinese stocks fell by 8.5% on doubts of the Chinese government’s commitment to supporting the markets.
Data from Trading Economics indicates the degree to which emerging markets as well as precious metals and oil producers have been affected by the Chinese meltdown. The JSE in South Africa dropped by almost 16% from its recorded highest level while the ASE in Australia fell by almost 9% at its lowest point in July from April and May highs.
The emerging market most affected has been Brazil where the Brazil Stock Market fell by over 21% between September 2014 and July 2015. The iShares MSCI Brazil Capped ETF (EWZ,-0.63%) dropped by 13% as July ended to record its biggest monthly fall in a year.
The degree to which investors have been withdrawing money from emerging markets is reflected in a Bank of America/ Merrill Lynch report last Friday saying that emerging markets were hit with outflows of $15 billion in the last three weeks of July.
China is amongst the world’s largest producers and consumers of oil, gold, silver and copper and the economic slowdown in that country has had a knock on effect on global commodity markets.
Investor concerns regarding the strength of the Chinese economy, following poor economic data and the rout of Chinese stock markets, have pushed oil prices down by double digits to enter bear market territory. U.S. oil futures (CLU%, -0.91%) lost almost 20% during July while Brent crude (LCOU5, -1.00%) lost 17% during the same period. Oil prices have been very much a victim of a gross oversupply situation accompanied by the fall off in demand.
Commodities with prices quoted in dollars (USD) have also been affected by the inverse ratio of their prices to the value of the U.S. currency.
Chinese economic prospects and the actions taken by the Chinese government to stimulate the economy are set to influence international markets for some time going forward.