Is This The Beginning Of Market Seasonality?

We all know that the market has ups and downs. This uncertainty is due to multiple factors, including international conflicts, government fiscal policy, and corporate performance data, among others. But we believe that market seasonality also plays a factor in how investors view stocks during different times of the year.  In this article I’m going to explore why I think market seasonality occurs and why I think this is important.

What is Market Seasonality?

Stocks move constantly through different investment phases.  The study of these cycles means there is a higher probability that stocks at some point will experience a sell-off between 8-20%. This is simply the regular course of how markets behave in most years. It is also part of the seasonal variation of how, in a normal investment year, stocks will trend  between bullish and bearish phases as measured by money flows.

While market declines can come at any time, statistically stocks are most prone to substantial sell-offs between the months of March and October. While this is not a given, it is important that we include this factor in the equation due to the fact that these seasonal patterns exist and given where we are in the calendar.

Why is Market Seasonality Important?

This Chart comes to us from Chart of the Day.com and takes a look at market seasonality.  Although it is a few years dated at this point, it’s illustration of these cyclical patterns is still valid  Here is their commentary that ran with the chart: "Today's chart illustrates the Dow's average performance for each calendar month since 1950 (blue columns) and the average monthly performance of the Dow from 1950 to the present (gray line). Today's chart illustrates that the Dow has tended to perform best during the last several months and first several months of a calendar year. During the middle of a calendar year, the Dow has tended to struggle (with the exception of July). It is worth noting that there have been only two calendar months during which the Dow has declined on average -- June and September."

The red box in the chart above marks the statistical period of market weakness.

One of the reasons I think this pattern works is the philosophy behind how most institutional money is invested. The investment community uses the term “institutional money” as a generic classification for large institutions, such as pension plans; and large asset managers, such as mutual funds. It is managed on a relative basis, usually tied to a specific benchmark and is also managed so as to not give up assets.

An example of relative basis is that in a market that loses ten percent, institutional accounts that go down only 8% are said to have outperformed their peer group. That influences how their portfolios are set up. Institutions generally start a year with similar economic and valuation expectations for stocks.

Unless they are carrying a negative bias for the economy, institutions have a very strong incentive to be heavily invested in the early months of a new year. They are afraid to fall too far behind their benchmarks. Their thinking is similar to that of a baseball manager at the beginning of a long season. The manager knows you don't win a pennant in April, but you can be knocked out of the running during that time if you lose to many games,

As the year progresses and, in particular, if stocks have advanced in the first few months, equities begin to look less attractive on year-end expectations. Stocks will either need unexpected positive news (i.e. better than expected earnings news or higher economic forecasts) or prices will begin to stall out.

What Is Possible?

Stocks will fall of their own weight unless there are marginal new bidders for their shares. Summer is typically a down period for Wall Street as the news flow often dries up, unless it’s bad news! It’s shocking how many international crises begin in the late spring/summer period. Both World Wars, the Korean War, 9/11, the First Gulf War and the 2008-banking crisis are examples of this.

Summer is also when analysts begin to fine-tune their expectations for stock prices as clarity starts to enter the picture about year-end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period of seasonal weakness. Once this discounting process is completed stocks will usually then begin to rally sometime in autumn.

The cynical among us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply, Wall Street wants to get paid. So there is a strong incentive to boost share prices during the 4th quarter of the year.

What Does This Mean For You?

Your portfolio and financial plan are long-term investments. Investing can be complicated and overwhelming, which many factors to consider, including market seasonality. In order to make the best decisions possible and create a portfolio that helps you feel secure and confident, it is important to work with a qualified and experienced financial professional.

This is where we come in. You can rely on us to understand the markets and use our depth of experience to make the best decisions possible for your finances. We want your investments to succeed and surpass your expectations. We would love to meet with you and answer any questions you may have. Please contact us at 708.488.0115 or by email at lumencapital@hotmail.com.  You can also keep up to date on our thoughts over at our blog, Solas!

About Chris

Christopher R. English is a money manager and the founder of Lumen Capital Management, LLC, a Registered Investment Advisory firm. Specializing in investment management and developing customized portfolios that reflect a client’s values and needs, he has nearly three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing lumencapital@hotmail.com.

*We own for certain clients at this time positions in Exchange Traded Funds {ETFs} related to the Dow Jones Industrial Averages.  We also own for clients and in personal accounts ETFs related to the S&P 500.  Please note these positions can change at any time without notice. 

Christopher R. English is the President and founder of Lumen Capital Management, LLC.-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for private investors and also manage a private investment partnership currently closed to outside investors. The information derived in these reports is taken from sources deemed reliable but cannot be guaranteed. Mr. English may, from time to time, write about stocks or other assets in which he or other family members has an investment. In such cases appropriate disclosure is made. Lumen Capital Management, LLC provides investment advice or recommendations only for its clientele. As such the information contained herein is designed solely for the clients or contacts of Lumen Capital Management, LLC and is not meant to be considered general investment advice.