Buy not sell in May and go away?

Certainly this has been the case for the last five years and this year was once again expected by the consensus to witness not only a long-awaited surge in capital expenditure in the US but also an economic recovery in Europe, a rebalancing of China’s economy towards more consumption-led growth and Japan’s emergence from its lost decades. 

These are the types of high hopes that have been dashed before but on this occasion forecasters were able to take heart from a slew of seemingly very buoyant confidence indices, such as the US and European Purchasing Managers’ Surveys.

Unfortunately, we believe that the message that emanates from these types of essentially subjective surveys has been heavily influenced by an unfortunate level of distortion within the seasonal adjustment processes that take place within the compilation of these series.

Specifically, the exact timing of the Global Financial Crisis in 2008 had the effect of “cancelling Christmas” for many companies and this Grinch-like phenomenon distorted the seasonal adjustment systems to such an extent that even today many of these models now implicitly assume that Christmas has been cancelled  indefinitely,  with the  result that they tend to portray the customary year-end surge in consumer spending (in Europe, some 40% of annual retail spending occurs in the run-up to Christmas) as a change in the economy’s  underlying  trend  
rather than merely a regular, seasonal event. Hence much of the survey data has been biased upwards and many forecasters both in the public and private sectors have therefore set their sights perhaps too high.