What You Need To Know About Seasonal Stock Trends

Everyone wants an edge when it comes to stock market investing. In fact, one could argue that the whole reason for the existence of financial news networks and online financial pundits is to give ideas to investors who are thirsting for information about how to achieve outsized gains. Oftentimes, seasonal factors are cited as tools that active investors can use to maximize gains and minimize losses. And while the stock market does more-or-less conform to traditional seasonal patterns, the risk is in the “more or less” part.

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Certainly, some seasonal trends seem to hold up on an average basis over the long run, but in the short run, there are no guarantees, so buyer beware. While these popularly discussed seasonal trends do seem on average to be consistent, you should only incorporate them as part of an overall portfolio strategy developed with the help of your financial advisor.

Let’s get the most obvious, commonly quoted seasonal trend out of the way up front. Yes, it’s true that over the long run the bulk of the stock market’s gains have occurred in the seasonally strong November-through-April period. According to Fidelity, going back to 1945, the S&P 500 has gained about 2% on average from May through October. But from November through April over that same time period, the S&P 500 gained about 6% annually. This outperformance extends to small-cap stocks and global stocks as well. 

While this seasonal tendency is strong, it doesn’t necessarily play out every year and it doesn’t factor in other costs, such as trading expenses or taxes.

Modern Money Etiquette: 

The opposite — but related — strategy to “buying in November through April” is the oft-quoted phrase, “sell in May and go away.” After all, if the May-through-October period is seasonally weak, why wouldn’t you want to be out of the market during that time?

There are two main reasons for this. First, as mentioned above, these seasonal trends are merely long-term averages. In any given year, there could be a spike up in the May-through-October period that could cost you long-term performance if you’re out of the market. Perhaps more importantly, just because the summer months seem to be weaker on average doesn’t mean they don’t still post gains. Since 1945, the Fidelity data shows that the stock market gains around 2% on average in the May-through-October period. That may not sound like a lot, but if you’re missing 2% of the market return every year, you’ll have little hope of beating or even matching the stock market over the long run.

Money Mistakes: 

Wall Street is nothing if not full of axioms, and one of the most popular is “as goes January, so goes the year.” And if you’re looking for a rip-roaring year in the market, you’ll want a strong January effect, which refers to the market’s returns from the last trading day in December through the fifth trading day in January.

Typically, this is a time when stocks beaten down by tax sellers in December attract buyers once more. If there’s a strong January effect, it means that investors are eager to buy, and it tends to bode well for the rest of the year. The opposite is also true — if investors are sluggish to pick up the so-called bargains created by tax-loss selling in December, it could mean a lack of buying enthusiasm for the stock market in general.

Fast Cash: 

At the end of most quarters, institutions undergo a ritual dubbed “window dressing” on Wall Street. As management companies like mutual funds generally report their holdings every quarter, they don’t want to show investors that they have been buying losing stocks. Thus, stocks that have performed poorly often suffer again at quarter-end as institutions unload their losers.

Similarly, high-performing stocks can sometimes get a bump near quarter-end as these same institutions buy winners to list them on their holdings sheets. Some funds don’t engage in such chicanery, but many do, which can contribute to this seasonal trend.

The so-called “triple witching” is a market phenomenon that occurs four times per year in the stock market, but it has nothing to do with Salem, Macbeth or The Wizard of Oz. The stock market’s “witching” refers to the simultaneous expiration of options, stock index futures and stock index options, which sounds much less exciting. However, it can create tremendous volatility in the stock market, so it’s definitely a seasonal anomaly that traders should keep their eyes on. The stock market triple witchings occur every year on the third Friday of March, June, September and December.

Although summer is smack dab in the middle of the worst-performing period of the year for the stock market, a phenomenon known as the “summer rally” still often occurs. However, the idea of a summer rally is a bit misleading. Typically, the six months including the summer are the weakest time for the stock market, and as the market rarely goes straight down for months on end, it’s only natural to expect a bounce at some point during the summer. Thus, while there may be a sharp 10%-ish gain at some point in the summer, on average, it’s not a sharp, sustained rally. And as with all of these seasonal stock market trends, it’s not necessarily one that a trader can bank on with any regularity.

One general seasonal trend is that the stock market tends to rise heading into a holiday period, such as a three-day weekend. While the general levity associated with holidays may seem like reason in and of itself for traders to be in a good mood, the reason for a rising stock market heading into a holiday is usually more technical in nature. As holidays approach, more investors take a break from the market, reducing trading volume. In this environment, fewer buyers are required to push prices higher. As the general long-term trend of the market is up, this effect tends to be heightened during times when fewer traders are present.

The weekend effect is the tendency of stock prices to perform worse on a Monday than they did on the previous Friday. This “seasonal” effect obviously doesn’t occur every week, and many times selloffs on Friday are followed by rip-roaring rallies on the subsequent Monday. However, it is true that companies often try to “hide” their bad news by releasing it on Friday afternoon or evening, after the markets have closed.

The first time investors have to react to this bad news is when trading resumes on Monday, so this can oftentimes lead to underperformance on the first day after the weekend.

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It’s perhaps no coincidence that October is that last month in the “sell in May and go away” seasonal cycle, as it’s also known as the month in which the most severe stock market crashes occur.

To some degree, the “October effect” is psychological, as past crashes such as Black Friday in 1929 and Black Monday in 1987 occurred in October and are always in the back of investors’ minds. However, October is also the last month in the statistically weaker May-October period for the market, and it follows the worst-performing month of the year on average, September.

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The “Presidential Cycle” might seem to have nothing to do with the stock market, but indirectly the two do show a correlation. Typically, stock market gains in the first two years of a presidential administration are not as high as in the second two years. This is partly political, as generally presidents attempt to push through major legislative changes in the first two years, while the final two years are often saddled with gridlock after midterm congressional changes. Historically, the third year of a presidential administration posts the best gains, according to the Stock Trader’s Almanac.

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