Investors love patterns. Whether charting technical indicators or analyzing earnings reports, finding recurring themes can give investors a sense of predictability amidst chaotic markets.
The most reliable patterns in finance tend to be based on the calendar year.
Seasonality refers to predictable, recurring market changes that tend to occur at the same time each year. While the market has calmed down after last week’s sudden sell-off, stock market bears who focus on seasonal patterns should be encouraged by this history ahead of this year’s election.
Ryan Detrick, chief market strategist at Carson Group, recently appeared on Yahoo Finance’s “Stocks in Translation” podcast to explain some of these patterns for investors. Detrick has long been a proponent of understanding the seasonal forces at work in the markets, but he cautioned: “We would never invest blindly on seasonality alone.”
Still, investors can leverage nearly a century of solid data from the S&P 500 (^GSPC) to analyze market trends.
For example, consumer spending typically increases during the holiday season: back-to-school shopping boosts retail sales in late August and early September, while summer vacations and public holidays can slow overall market activity and reduce transaction volumes.
All of this creates observable patterns in the markets that affect the prices of stocks, bonds, commodities, and even cryptocurrencies. This data allows us to analyze the returns for each day of the year to find the average loss or gain, and then combine the results to create a seasonality map for the year.
This graph shows that stock prices tend to rise each year, but the average annual increase is interrupted by large drops in September and October. The data reflects the numerous market crashes that occurred in September and October, including Black Monday in October 1987 and Black Tuesday in October 1929.
Towards the end of October, things tend to improve on average, with stock prices often rising towards the end of the year, capping off with the much-celebrated Santa Claus rally.
However, August will not be an easy month for investors either.
“Historically, when markets experience declines in August, they tend to be bigger than any other month,” Detrick said, citing significant events such as Iraq’s invasion of Kuwait in 1990, the Asian contagion in 1997 and the S&P downgrade of U.S. debt in 2011.
As the S&P 500 seasonality map shows, on average, not much happens in August.
However, the impact of rising volatility can be seen by examining the seasonality of the VIX (^VIX), which provides a variety of seasonal clues for investors to decipher.
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The chart below was created by averaging monthly VIX closing values from 1990, when the index began to be calculated, through 2023. We can see that volatility typically bottoms in July, rises in August, peaks in October, and then declines towards the end of the year.
But seasonality isn’t just about monthly patterns.
The four-year US election and presidential election cycle provides a unique lens through which to view market movements.
Detrick noted that each four-year period has its own characteristics and trends, with the S&P 500 rising an average of 7% in the fourth year of the cycle.
But seasonality has many limitations, not the least of which is that the data set is somewhat limited, and Detrick cautions investors that the key to the current environment is uncertainty around the election, the Fed, the U.S. economy, etc.
“It’s important to remember that scary headlines and falling stock prices are normal most years,” Detrick said.
While seasonality gives us clues about how the market got here and where it may be heading next, it’s not a crystal ball, it’s just a tool.
“We’ve been through this before,” Detrick said. “Investors need to remember that we can get through this again.”
In Yahoo Finance’s “Stocks in Translation” podcast, Yahoo Finance Editor Jared Blikre cuts through the market chaos, messy numbers and hyperbole to bring you important conversations and insights from across the investing landscape. He gives you the critical context you need to make the right decisions for your portfolio. More episodes are available on our video hub. Listen on your favorite streaming service or subscribe and listen on Apple Podcasts, Spotify or wherever you find your favorite podcasts.
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