Sell in May and go away, it used to be said. This would not have been a particularly lucrative investing strategy in the past 20 years or so, but you could have done worse than follow its simplistic prescription this year. Depending on exactly when you sold in May and what you had done with the cash, you might now be one of the few investors with a smile on your face as you contemplate the second half of this annus horribilis.

For all the talk of global depression, until two months ago the equity market was the dog that hadn't barked in the great US financial crisis. After almost a year of constant bad news - slumping house prices, collapsing banks, surging oil and food costs, plummeting consumer confidence - stocks actually prospered somewhat.

On August 16 last year, after the sub-prime crisis had just started to invade the psyche of American investors, the Dow Jones industrial average dropped just below 12,500. On May 19, six weeks ago, it reached a recent peak of 13,170, up 6 per cent in nine months. Not bad in a normal year, but when talk everywhere is of financial apocalypse it was something of a miracle.

Especially encouraging, of course, is that the stock market, unlike some other asset categories, is supposed to be a forward indicator. If investors were confident enough in the past year to keep buying the biggest (and potentially most vulnerable) US companies, then surely the most dire predictions for the American economy could not possibly come true.

That was all fine until May burst forth in full flower. In the past six weeks, someone finally seems to have told equity investors the bad news and they, finally, seem to have got the message.

Since hitting that brief peak in mid-May, the Dow Jones is down about 14 per cent. The broader S&P 500 had fared a little better, off about 11 per cent. In Britain, the FTSE, moving more or less in lockstep, is off about 13 per cent.

The latest plunge has not only brought an end to happy optimism that all will be well. It has also confirmed that, as far as equities are concerned, the last decade really has been the lost decade.

Ten years ago the S&P 500 had surged to just under 1,200. After the latest swoon it stands barely above that level. If the index falls only another 50 points in the second half of this year, it will end 2008 lower than where it ended in 1998. If the effect of inflation is factored in, the real loss in equities is about 30 per cent.

For Britain, of course, this baleful achievement has already been recorded. The FTSE 100 was trading yesterday about 8 per cent below where it was at the end of June 1998. With inflation, the ten-year loss in the UK market is closer to 40 per cent.

For investors raised on the mantra that investing in equities always pays in the long run, this is quite a shock. Certainly, we can redefine the long run, elongate it a little and discover that, over the past 20 years, say, equity investing has still paid dividends relative to cash or bonds. But that gain is getting smaller by the week.

The immediate question as the second half of 2008 begins is why the stock market suddenly has joined almost all other financial markets and headed south.

One familiar culprit could be inflation fears and interest rates. The yield on the ten-year Treasury dropped to 3.78 on May 20. As inflation concerns took hold and as the US Federal Reserve indicated that it would not be cutting rates any more, it then rose sharply and reached 4.2 per cent by mid-June.

But this explanation does not fit the most recent decline in the stock market. In the past two weeks, as the equity collapse has accelerated, bonds have rallied and the yield on the ten-year Treasury fell back below 4 per cent last week.

Oil prices are usually cited as another reason for recent investor alarm. The price of crude has jumped by 10 per cent since mid-May. But in the previous six weeks oil rose by more than 30 per cent, at a time when equities were moving sideways.

Some people think that the sharp decline in stocks is primarily the result of financial sector weakness. The big Wall Street banks have been hammered in the past few weeks. Yet even this is an incomplete story. Bank stocks are certainly under pressure, but the overall financial climate is not noticeably worse than it was, say, before the Bear Stearns collapse in March.

The worrying conclusion is that the latest fall is a product of all these factors and more. That is, investors have simply decided that the mild, restrained optimism they have been clinging to for the past year is no longer justified by the immediate economic outlook. When they look at inflation, oil, the health of the financial sector and the continuing malaise in the housing market, they have just decided to sell and go away. And not just in May.

gerard.baker@thetimes.co.uk

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