Seasonality is defined as a time series in which data experiences predictable changes that recur every calendar year. Any regular fluctuation that repeats over a one year period is considered seasonal (shoutout to all my data scientists!). It exists in most industries across the labor market. The Federal Reserve Bank of Chicago conducted research on the estimated seasonal effects on employment for selected industries between 1939 - 2016. The study focuses on the industries of construction, manufacturing, retail trade, and government.
The Y-axis represents the percentage change above or below the annual average, represented by 0. The X-axis represents each calendar month. Employment in construction is well below the annual average in the winter months, especially in January and February as it is nearly 10% below average. The weather plays a major role in seasonality for the construction industry as projects are delayed until warmer months. Employment in retail skyrockets as the calendar year approaches the holiday season. The decline in government employment can be explained by school closings during the summer and families enjoying the warmer weather.
Change in weather, school closings, and holidays tend to drive seasonality across most industries, but does it impact the stock market?
There is an old Wall Street adage, “Sell in May and go away”. The roots of this saying are derived from old English merchants and bankers that recognized business activity slowed down as workers and families left London’s financial district for the summer. Investment performance declined during the summer months due to decreased volume. As fall approached, activity would again improve and investment performance would follow suit.
”Sell in May and go away” plays into seasonality. From a high level perspective, the strategy would seem plausible. After all, the stock market crash of 1929 happened in October, the stock market crash of 1987 also happened in October and the Great Recession of 2008/2009 started in September. How has the market historically performed over the summer months?
Stock market performance between May - October has historically produced lower returns compared to the months of November - April. The Dow Jones Industrial Average returned on average 0.3% from May - October compared to 7.5% from November - April from 1950 - 2013 according to Forbes. Since the inception of the S&P in 1957, the index has returned 1.3% from May - October compared to 6.9% from November - April according to the Wall Street Journal. Low trade volume during the summer months can be attributed to the decline in performance, while increased investment inflows during the winter months provides one reason for investment growth, leading us to think seasonality does exist in the stock market. However, recent performance will say otherwise.
According to the Motley Fool, the S&P 500 from May 1 - October 31 has produced positive results since 2013:
One problem with the old Wall Street adage is that past performance is not indicative of future returns. We can learn from history, but we also must understand that the variables are different each time. The economy and market valuations are different today than they were in 1950. Therefore, we cannot base our decisions on seasonality trends that have not applied to market performance over the past decade.
Markets record gains throughout the course of the year. Staying invested is the best thing a long term investor can do. As you know from our previous blog, Should I Stay Invested, by missing the 10 best performing days between 2000-2019, your return decreases by 50%. That is the opportunity cost of market timing, or as I like to call it, opportunity lost. Timing the market and trying to avoid dormant or negative periods is not a habit we want our clients to get into, nor is it a strategy that works. What’s important is understanding that periods of underperformance are part of the natural market cycle. By reacting negatively to shorter term issues (May - October or 5 months) you risk your future investment potential in the long term.
Not only is portfolio timing detrimental to your future self, it also has an impact on your current state of personal well being. The constant barrage of listening to financial pundits, trading OTC stocks, and writing call options can take an emotional toll on you. Following a short term trade strategy will play into your investor biases. If you succeed once, you’re susceptible to confirmation bias, meaning you’ll view a new situation with the same exact lens as a previous decision even when the players are different. If you decide to not participate in this year’s “sell in May and go away” strategy and in turn the market declines you’ll be susceptible to hindsight bias and find yourself in a mental trap going forward (isn’t investing fun!?).
This is one of many market myths we may find investors believing, or worse, acting upon. History will tell us that there is never one asset class, strategy, or investment that outperforms everything else at all times, forever. It’s important to balance what we know of the past, and what we don’t know of the future.
Recent positive returns of the stock market from May - October have proven that past performance is not indicative of future results. Our investment strategies should be focused around the goals we allocate our dollars toward. As the summer months quickly approach, seasonality is in full swing. This year feels just a little different than last. Stay invested, stay safe and go enjoy it.
If you and your partner have different investment philosophies and are looking to craft a new joint strategy then contact us today for a FREE consultation. It’s never too late to get on the same page financially.
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.