Seasonalities – beware: fast food!

Charts on seasonalities and market cycles belong to the daily routine on the financial scene these days. But on closer observation, they mostly tend to be fast-food items that are quickly consumed and hard to digest, because although playing with historical time-series data provides plenty of fodder for conversation, it delivers little added value for investors. They are better advised to concentrate on a long-term investment strategy and to regard historical time-series analyses solely as an amusement.

 

Picturesque, but often not more than that

Historical time-series comparisons have long since become part of the standard repertoire of financial market observers, are regularly added bonuses in market analyses, and haunt us on social media every day. Since they are often very vividly illustrative, they are accordingly popular and have thus sometimes also been present in our commentaries on the markets. But now and again the (high) correlations presented lack corresponding causality, so some jumbles of data served up may deliver anecdotes, but give investors little added value.

 

Gruesomely alluring | Crash comparisons arouse only attention

Stock-market crash overlay: 2022 vs. 2008 (June 5, 2008 = August 19, 2022)

Sources: Bloomberg, Nautilus Investment Research, Kaiser Partner Privatbank

 

One, of course, always has to differentiate, though. Many historical findings are definitely useful to an investor. For example, it is helpful to know that the US yield curve in the past has habitually inverted a few quarters before the start of each recession [A look at the (yield) curve] and that the equity market usually finds a floor a few months before the end of a recession [Monthly Market Monitor August 2022]. But alongside the useful information, there is also less useful data confusion. Besides obviously arbitrary time-series overlays without any contextual connection like the crash comparisons, for example, that gladly get shown over and over again, the “nice chart, but what now?” category also includes two seasonality classics: the US presidential cycle and the summer/winter seasonality (sell in May…) on the US equity market.

 

The summer rally of 2022… | …was not on the schedule

US presidential cycle and S&P 500 index

Sources: Bloomberg, Kaiser Partner Privatbank

 

Sell in May… (and buy back at higher prices)

The presidential cycle is particularly back on everyone’s lips at the moment in view of the upcoming midterm elections in November. But precisely what this pattern didn’t even remotely foresee was this year’s summer rally, which was one of the strongest of all time, mind you. With a little goodwill, the nadir in late June at least would fit with the historical pattern. The adage “sell in May and go away…” would have spared an investor from a few turbulent weeks and an intermittent drawdown of around 10% this year. But whether this will still pay off when the investor returns to the equity market at the end of September (“…but remember to come back in September”) or on Halloween (the American variant) as the maxim prescribes remains to be seen, because although the summer months are in fact a bit weaker on average than the winter months, on the bottom line they nonetheless historically have delivered positive returns. So, whoever wasn’t invested in the summer months gave up some performance.

 

Under the microscope… | …only minimal seasonal tendencies

Monthly performance of S&P 500 index since 1950

Sources: Bloomberg, Kaiser Partner Privatbank

Viewed over a very long-term time frame, the summer/winter seasonality almost completely disappears. The more years that get included in the analysis and seasonality chart, the more the average annual price evolution smooths out. If you examine the performance of the S&P 500 index over the last 70 years, what’s left in the end is an almost continually ascending line that almost resembles a straight line. It takes a magnifying glass to detect more granular patterns such as a bigger-than-average positive April or a phase of weakness in September/October.

 

The more years… | …the more average

Seasonality of the S&P 500 index over different time periods

Sources: Bloomberg, Kaiser Partner Privatbank

However, this knowledge has limited practical utility. This becomes obvious when one compares a few random years with a multiyear average, because an individual year can deviate enormously from the average and doesn’t follow a set timetable. So, it is best to use knowledge about historical tendencies in combination with many other “tactical” observations such as chart, sentiment, capital-flow, and other similar analyses – and even then this is more an art than a science that is best left to trading-oriented hobbyists and pros and institutional market participants. An investor whose goal is “only” to preserve the value of his or her assets or even to earn a good risk-adjusted return should shun such temptations due to the low prospects of success and should view seasonality and cycle analyses solely as an amusement in the daily financial boulevard press. Continually sticking to a chosen investment strategy the whole year round will reward this investor with a higher return in the long run.

 

Random walk | Individual years do not follow a pattern

Annual evolution of S&P 500 index from 2015 through 2019

Sources: Bloomberg, Kaiser Partner Privatbank

 

Oliver Hackel, CFA Senior Investment Strategist

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