Stock market activity is seasonal but not a perfect investment barometer.
Over the last year, there has been an abundance of financial media attention surrounding stock market seasonality.
Even with the 24/7 media chatter about trade wars, political chaos, and rising interest rates, most investors hear catchy phrases like “The January Effect”, “Sell in May and Go Away”, “Santa Claus Rallies” and “October Crashes”. Even in academia, many investment textbooks cover the historical nature of the “January Effect.”
This is not new, Fintech lingo. These same phrases can be found in investment books written over 100 years ago!
Is it Real or a Wall Street Myth?
In studying the monthly percentage moves of the stock market since 1970, there is clear evidence that U.S. equities’ performance does consistently vary on a seasonal basis.
As shown on the table and chart below, both the S&P 500 Index and Dow Jones Industrial Average have historically produced paltry average monthly gains of only 0.2% and 0.1% from June 1st to October 31st. In positive contrast, from November 1st to May 31st of the following year, both indices produced average monthly gains of over 1%! Even when the data is sub-divided into positive years and negative years, the results are nearly the same.
Table 1: S&P 500 & DJIA Monthly % Returns Since 1970
Chart 1: DJIA Monthly % Returns Since 2009
While there is much speculation on the interpretation of stock market seasonality, the real issue is:
Clearly, investors fixated on quarterly returns in which are missing the big picture. I think every stock investor should be aware of the bullish bias of November through May of the following year and the bearish volatility of June to October in gauging exposure to the stock market.
Avoid Taxes by Hedging in May?
Unlike investors from 100 years ago, we live in a world of high investment taxes. Even short-term traders, who blindly use this analysis, could end up with high short-term capital gains taxes (at year-end) which would nullify any benefit of “Selling in May and Going Away” until November. Active investors should consider reducing their stock market exposure by using ETFs or derivatives as hedges during the market’s traditional “Summertime blues” and/or selling lagging stocks from tax deferred accounts such as IRA’s & SEP’s.
When Should I Buy New Investments?
Stock Investors should take a cue from commodity traders. When the seasonal trends are in their favor, they increase exposure to their commodity positions and reduce exposure when the opposite is true. Stock investors should consider adding new stock positions in November and being more patient & selective with new investments from June through October.
Keep in mind that the financial weather is hard to predict. This knowledge is best used as a backdrop to the short term market conditions and is most effective when used in conjunction with technical indicators (like the 200-day moving average). Clearly there can be miscues – like last November and December -7% nosedive!