Seasonality

Historically, monthly seasonal patterns have had an impact on stock returns. The following chart illustrates the seasonality of market returns that are an important part of our active management strategy.  History suggests that there may be modest stock market gains in the six months between May and October, and that most of the gains in the stock market (represented by the Dow Jones Industrial Average) tend to occur in the six months of November through April.

 
Source: Bloomberg

Why do seasonal trends exist? 

As with all pricing mechanisms, stock prices are driven by cash flows, and there are tendencies for certain cash flow to be higher in the winter months than in the summer. For example, in the fall and winter:

  • Most mutual funds have fiscal years that end October 31 so that mutual fund companies can complete the accounting work necessary to calculate year-end distributions that occur in November and December. 

  • Employers often make bonus decisions and payments to employees in December and January, tied to the holiday or year-end results.

  • Employers often make discretionary contributions to profit-sharing and 401k plans after year-end, and IRA contributions are due by April 15.

  • Many small business owners (which employ half of all private sector employees) wait until they close their books at year end to understand their profits and determine how to distribute those profits.

  • Many of these positive cash flows are automatically invested in the market (most mutual fund distributions are reinvested, and most contributions to retirement plans are set up to, in part or in whole, invest automatically into the stock market.

In the spring and summer, a significant decrease in buying activity occurs since most of the natural positive cash flow dries up, for example:

  • Income taxes are due in April and tax payers may scrape by and limit investment activity in subsequent months.

  • Wall Street traders are unable to watch markets as closely over the summer, so they reduce risk by holding lower quantities of common stock. This is evidenced by the lower historical trading volume over summer months (August and September volumes are the lowest two-month combination of the year). 

This analysis raises the question of why an investor would want to buy and hold stock investments when historical analysis shows that close attention to seasonality may reduce risk in certain time periods over the long run.

The Stock Trader’s Almanac study of seasonal patterns in stock returns shows that returns for the Dow Jones Industrial Average does have a tendency to demonstrate strength in the winter and weakness in the summer. Looking at historical returns over several time periods (since 1950, over the last 30 years, and over the last 10 years), the strong period from November to April generated 4% to 7% higher annualized returns than the weak period from May to October.

Stock Trader's Almanac
Seasonal Patterns
Period Strong period November to April Weak period May to October 12 months November to October
From 1950 6.9% -0.1% 6.8%
Last 30 years 7.8% 0.8% 8.6%
Last 10 years 2.7% -2.0% -0.1%
Source: Stock Trader's Almanac

Analyzing the same seasonal data in a slightly different way, a $10,000 investment in 1950 generates a very different outcome if only invested in the stock market in the winter or summer. A $10,000 investment that was invested only during the winter would grow to $602,126, while the same $10,000 invested over the same 61-year time period but invested only during the summer would actually decline to $9,672. Although investors cannot invest directly in an index, this example demonstrates the impact of seasonality on investment returns.
 

 
Source: Bloomberg

Past performance is not indicative of future results. This information is for illustrative purposes only and is not indicative of any investment or strategy result. Indices are unmanaged, and one cannot invest directly in any index. The S&P 500 is an index of 500 stocks representing major U.S. industry sectors. The Dow Jones Industrial Average is an index of 30 large U.S. company stocks.

The investment recommendations and/or assumptions made herein are not meant to be a prediction of future performance or events. Losses can occur from any investment, including those recommended by Retirement Income Solutions, and it is likely any assumption used herein will not occur as estimated. Factors such as size and performance of investment positions and accounts, length of time positions are held, the amount and timing of purchases and sales, client objectives and restrictions, tax issues, interest rates, cyclical securities price trends, news pertaining to investments and markets, changes in client plans and other factors all influence performance and assumptions materially. No investment strategy or investment plan, including a well-diversified portfolio rebalanced periodically, can guarantee a return or that losses will not occur.

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