Amid Covid resurgence, markets revisit irrational exuberance

The sharp sell-off last week in equity markets that started on Wall Street and spread worldwide should serve as a reminder that when investing, risk and volatility are just as important considerations as expected return.

Two well-known market sayings spring to mind, the first being "sell in May and go away". Traditionally, this is taken to mean that it is advisable to sell one's stocks in May during the northern hemisphere's summer months before possibly re-entering the market later in the year when winter sets in, usually around November. The assumption is that people are away on vacation in the summer months, thus leading to lower trading volumes and subdued stock market performance. Many studies have also borne out the contention that equities generally do not do well in the May to October period.

This May, however, is different. Although stocks have plunged, travel is still severely curbed by the ongoing pandemic so the traditional logic of weakness because investors have gone on holiday does not apply. Instead, perhaps the second bit of market wisdom is more apt. In 1996, Alan Greenspan, then-chairman of the US Federal Reserve, speaking of the challenges faced by central bankers, said: "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"