The Pros and Cons of Seasonal Investing

The Five Seasonal Stock Market Adages and Why You Should (or Shouldn’t) Follow Their Patterns

Agenda Book

We all know that the news from across the world can rock our markets, but in addition, there are myriad seasonal investing trends (movements during certain times of the year) to consider. But should you really pay attention to any of them? That all depends. First let’s look at the most well-known stock market adages:

  • Santa Claus Rally (stock market rallies in December, usually the last week). The truth: According to The Stock Trader’s Almanac, since 1950, the average gain for this period of the year has been 1.3%, and since 1969, it has generated positive returns 75% of the time.
  • Sell in May and Go Away (November 1 – April 30 are considered the best months of the year for the markets). The truth: A report by Barclays found that average returns from 1970-2017 were stronger between November and April than they are in May through October.
  • The January Barometer (as goes January, so goes the rest of the year). The truth: According to Fidelity, in regard to the U.S. markets, “an up January has generally been bullish for stocks, particularly when the market has gained more than 5% in January.” Since 1945, the January barometer held true 75% of the time when the market was up in January (as has been the case so far this year). But, declines in January have not reliably predicted a weaker year.
  • The Presidential Market Cycle (first year following a presidential election is usually the worst, with the third and fourth years seeing above-average performance). The truth: History bears out the cycle; but with President Trump, the pattern changed. Whether or not that will continue into the future remains to be seen.
  • October is a Scary Month (many market crashes have occurred in October—Panic of 1907, Black Tuesday 1929, Black Thursday 1929, Black Monday 1929 and Black Monday 1987). The truth: October is the most volatile month. According to CFRA Research from 1950 to present day, “The S&P 500 on average registers more daily moves of at least 1% in October than in any other month.” On the flip side, however, going back to 1950, the S&P 500 has averaged a gain of 0.7% in October, according to The Stock Trader’s Almanac.

The Pros and Cons of Following Seasonal Stock Market Adages

As you can see from the data above, these adages aren’t reliable, though they certainly can be predictors. For example, the holiday season comes and goes in December every year, and people are unlikely to stop spending more money then, than the rest of the year. But what about following all of them?

Pros of Seasonal Investing

  • Predictions and trends are easily found, because these seasonal adages are well known, tracked and reported upon. The ones above are supported by decades of data.
  • There are many other seasonal trades, such as in commodities—sugar, natural gas, heating oil, grains, coffee, copper, etc.—that are influenced by seasonal weather, as well as patterns, cycles and trends in consumption, supply and demand. So in terms of diversifying your portfolio based on seasons, you have options.
  • There are many companies with predictable seasonality, like amusement parks whose profits are made in the spring and summer, giving their stocks a seasonal boost. Or retailers whose big months are the end of summer and holidays.

Cons of Seasonal Investing

  • When it comes to seasonal investing, timing is everything and no one is perfect at market timing.
  • You need to be a day trader or a short-term investor, otherwise, the calendar should only be a minor consideration in deciding whether to buy or sell stocks.
  • There are more factors than what’s most obvious. For example, President Trump completely changed the pattern of the Presidential Market Cycle — and there’s no way to predict a change of pattern.

We find that while seasonality comes with history and data, it’s best to stick with the trends, the charts and the fundamentals of the companies in which you’re invested.


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