Market Seasonality

I am frequently asked about market seasonality and why I discuss this so often.  So today, as I have done in the past, I  thought I'd reprint this piece that was originally posted to our blog on April 6, 2012. It was part of a set of articles done in a question and answer style and published serially back then.  {Note:  Highlighted bullet points.}  Not much about this has changed since I originally wrote this article.  I think it's a timely reprint given where we are in the year and current seasonal patterns.  Note that as I'm writing this many major market indices have experienced returns in the first four months of 2021 that are approaching or have exceeded their historical annual returns.  Below is the reprint.

You place a lot of emphasis on market seasonality. Why is that?

We have touched on this in past client letters here  here and here. Basically there are seasonal variations or patterns that come into play in most years. The study of these bullish and bearish phases means that I accept as a given that stocks at some point this year will experience a sell off between 8-20%. This is simply the normal course of how markets behave in most years. It is part of the seasonal variation of how in a normal investment year stocks will cycle between bullish and bearish phases as measured by money flows. While market declines can come at any time, statistically stocks are most prone to major sell offs in between the months of March and October.

As I've said in the past one of the reasons I think this pattern works is the philosophy behind how most of what we refer to as institutional money is invested. Institutional money is a generic term 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 the assets. By relative basis I mean as an example 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.

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 lose one during that time. 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 for example} or prices will begin to stall out. One of my concerns right now is that the markets have had such a strong move that much of the economic expectations are already priced into stocks. If companies don't excessively move the needle higher on earnings and sales going forward than investors, especially those with a shorter term horizon, may begin to lock in their profits.   {Updated Note with this reprint:  While the last two sentences in this paragraph were written back in 2012, these words would apply especially well to this article as it is reprinted at this time in 2021.}

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 is amazing 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 begins 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 amongst 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.

The World Only Gets To End Once

The World Only Gets to End Once

I recently struck up a conversation with a businessman while I was traveling in Florida.    After a few minutes of it we got around to what we both did for a living.  When he found out what line of work I was in he became silent.  After a pause he said, “I pulled all of my money out of the markets last spring and never put it back in.  Whaddya think?”

I’ve probably heard this or similar stories multiple times in the past year.  I can understand the thinking given everything that happened.  COVID became THE consuming story of 2020.   Literally overnight we were plunged into a world where survival seemed to depend on keeping to yourself or within a small group that you could trust such as your family.  There was no hope back then that things would get better anytime soon.  Some investors responded by pulling some or even all of their money out at the worst time.  World markets lost 30-40% of their value in mere weeks.  Panic selling gripped many in late March.  Some who survived that first drawdown and perhaps fearing a reversal of fortune later in the year also pulled out their cash with each new surge of the virus or with the social unrest later on.  Stocks also wobbled last fall on the election issues.  Yet each time the market ultimately found its footing and then moved higher.  Why did that happen?

Here’s why.  If this was an old Hollywood Western about a town taken over by bad guys, then last spring was the point where the Sheriff {played of course by John Wayne} came to the rescue.  In our case the Sheriff was Uncle Sam throwing oodles of cash and guarantees out of helicopters and train windows.  The money and backstopping by the Federal government worked.  The stock market stabilized, many people had enough money to at least buy groceries and slowly we began to adapt to a world where we had to learn to live with COVID-19.  Markets started rebounding almost right away as the Government opened those money spigots.  By summer investors were sorting through the perceived winners and losers in the stay-at-home economy emerging at the time. By autumn, as rumors of vaccines began percolating, investors began looking forward to what things would look like when all of this was behind us.  Major US indices finished higher in 2020.  That’s an astounding when thinking about all that happened last year.

Markets obsess about the future so investors need information as that’s how they discount what could happen next. The problem for most folks is their primary source for this is popular media.  News organizations crave eyeballs, and they know that generally happy stories don’t sell, or at least they don’t sell as well as spectacular headlines of disastrous things.  Here’s an obvious example.  The press has been full of stories about all the negatives since the virus became a thing last year, but for much of that time you had to dig really deep into specialized areas of the web to find out about the fantastic progress being made in finding a vaccine for COVID.  The development of these vaccines via Operation Warp Speed is a story of national organization that rivals World War II’s Manhattan Project or the moon missions, yet today you’ll be able to find more stories about the occasional negatives of the vaccines than the remarkable story about how they were developed.  Investors that get their news primarily from traditional media outlets will miss turning points in stocks because markets have often discounted the worst-case scenarios when the news cycle is the worst. 

That brings us to markets as we now find them.  Stocks experienced an incredible run since last year’s lows.  Many pundits now point to that massive move as evidence why we must be near a major top for stocks. I would say there's now a higher probability markets may mark time and could even trade lower in the coming months.  We’ve had a big move and seasonal factors need to be accounted for.  But I think this is a shorter-term concern. I believe markets have the ability to ultimately move higher in the next year or so, regardless of these potential near-term fluctuations.  The reasons why I think that should be well known to my investors and readers, but I will restate it below.   

My optimistic outlook for the coming years is based on a foundational belief that we're in an era driven by rapid, exponential growth in knowledge.  This in turn is bringing about transformational change to almost every level of society and almost every business or industry.  This growth of information is aided and abetted by modern technology.  This is how the Chinese were able to publish the genetic sequence of the COVID-19 virus so soon after discovering it late in 2019.   This critical piece of information was part of the building blocks that led to better diagnostics, better treatment of the virus and aided in the development of numerous vaccines.  This knowledge trend was well in place prior to COVID but has only accelerated because of it.  This long-term factor  is creating new businesses and giving life to older ones.  Plus, I believe we’re entering a period of economic growth similar to how the US looked at the end of World War II.  Like then, Americans had been cooped up generating savings with little on which to spend their money during the war.  That changed soon after and the economy took off on a multi-decade expansion unleashed by all that money originally on the sidelines.  We’re seeing a similar picture now.  Anybody who’s traveled extensively as I recently have can attest that life is returning to normal at a rapid rate.  Add all the stimulus in the system to this pent-up demand and you have the ingredients for economic growth rates not seen in decades.  This is why I think investors with a proper time frame will be rewarded, even if we get some choppiness in the coming months. 

That gets me back to all those investors who feared the end of the world last year and the dilemma they now face.  They have missed one of the best historical moves in stocks, albeit one that started with a 40% drop last winter.  That investor, if they want to own equities as an asset class, now need to find a way for getting back into the market  These are their choices as I see it: go all in at once, dollar cost average into the markets, wait for a pullback or some combination of the lot.  Discipline, in the event you pulled money out back then or have new money to invest, will become important.  Developing a game plan on your own or with somebody like me can help, especially if you want to wait for the inevitable pullback in share prices.   Over the long-haul US equities have a stellar track record in terms of total return on assets, but the price that you pay when you buy a ticket into stocks is volatility.  Disciplined investors with a sound fundamental view of the assets they are buying can take advantage of this volatility.  However, this type of investing requires patience to wait for the right moment.  That time will come again.  It may not be a global event such as a pandemic.  Instead it may simply be the inevitable cycle between bulls and bears, but there will come a time again when markets or specific sectors go on sale due to volatility.  Disciplined investors can take advantage of those periods.

Sometimes though stocks go down in spectacular fashion.  There are few things in my line of work that I’m confident in saying but I’m comfortable with this.  Events will again happen in the future that cause market disruption.  There will be other bad days for investors.  Hopefully none will ever be as dire as what we faced in 2020.  A global pandemic is right up there on the badness scale.  Instead it will be something else, scary and unexpected.   But the world will not end, regardless of what the press will say at the time.    I’ve seen my share of bad days and bad market cycles over the years, as well as plenty of short-term events that many feared were the end of things.  The closest from a financial sense we ever came to the world ending on my watch was back in 2008-09 as the housing crisis threatened to overwhelm the financial system.  The Government stepped in back then and pulled us away from the brink.  Slowly we worked our way out of that mess. Few said in March of 2009 as markets made a generational low that now was the time to buy. Those back then calling for a further apocalypse are still waiting.  

Similarly, many called for an end of the world last spring.  Some say that could still happen.  It won’t. There may be setbacks and new variants, but we’ve likely taken the measure of the COVID beast.  I recently saw a caption that sums up my viewpoint.  “And so, while the end-of-the-world scenario will be rife with unimaginable horrors, we believe that the pre-end period will be filled with unprecedented opportunities for profit.”  I believe we’re still in the time before the end of things.  Hopefully, this period will last for many more decades, if not centuries.   Many say I tend to have a more optimistic view of things, yet I can also dream up disastrous scenarios if necessary.   But you don’t need me for that because these are always out there.  Go punch in your favorite worry on the internet and you’ll likely find a horrible ending to it online.  If we’re going to have that really bad day, then I’m guessing it will be a foreign policy mistake.   I’ll take the bet that the instinct for self-preservation will prevail, even if at times things become worrisome. 

Someday the world will end, but it only gets to do so once.  The time between now and the end, whenever that is, will likely be filled with those opportunities for profit.  Let’s go find them together!

Stay healthy, get vaccinated, God bless.

If you have any questions about ETFs or how we create and manage your portfolio, please reach out to me at 312.953.8825 or by email at lumencapital@hotmail.com.  

Photos and content are sole property of Christopher R. English and or Lumen Capital Management, LLC

About Chris

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 investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over 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 312.953.8825 or emailing him at lumencapital@hotmail.com.

Thoughts From The Road {Part III}

I pity public health officials right now.  Here they are legitimately concerned with an increase in Covid cases, particularly an uptick in a more contagious variant known as B.1.1.7.  Epidemiologist Michael Osterholm was all over the Sunday news shows discussing this.  CDC director Dr. Rochelle Walensky spoke about this in very stark terms last week, even warning Americans that they faced "impending doom" as case counts rise.  At home, public health officials are again talking about restrictions and business closures in suburban Cook County as case counts rise.  The tone and actions from medical and political authorities sounds no different than any time in the past year, but this time the public doesn't seem to care.   Airports are packed, resorts are booked and restaurants are turning away business.  I noted last week that Covid may not be done with Americans, but Americans are done with Covid.  People are still wearing masks from what I can tell but they are increasingly demanding their lives back.  I am not debating whether or not this is what should be happening.  I'm stating what the facts on the ground are showing. 

You can also see this in the economic data that keeps coming out.  916,000 job were added in March.  That's the best count since last August.  The stock market is responding today to that job number on Friday.  Stocks have already anticipated a reopening in 2021.  I think the market is coming to grips with something I've been saying for weeks now that US economic growth is going to be much better than current estimates indicate.  The major part of the Covid economy crisis has lasted about a year and it's almost as if the last 12 months of peoples lives have been erased.  All the things that didn't happen in 2020 from weddings to trips are getting folded into 2021.  The economy was in pretty good shape prior to the crisis and all those stimulus checks are certainly burning holes in peoples pockets.  They saved the first few rounds of government money but I'm pretty sure they'll spend this current windfall.  Be prepared for those really good economic numbers in the coming months.

Finally they're playing baseball again!  This time there's fans in the stands!  Baseball will always mean for me the coming of better weather and this year I believe better times.

"The one constant through all the years Ray has been baseball. America has rolled by like an army of steamrollers. It's been erased like a blackboard, rebuilt and erased again, but baseball has marked the time. This field, this game is a part of our past Ray. It reminds us of all once was good and could be again."-James Earl Jones as Terence Mann in "Field of Dreams."

Also an early Happy Birthday to RJE as you practice before the Supreme Bar.  Down here you would have been 89.  God bless and miss you. 

PS.  There may not be a column next week.  We're returning to Chicago over the weekend and I'm also scheduled to get my 2nd dose of the vaccine.  Will depend on how I feel.