The attached note looks at seasonal patterns in share markets. The key points are as follows:
- Seasonal patterns typically see shares do well from around November to May and not so well from May to November. This partly reflects a combination of tax loss not so well from May to November. This partly reflects a combination of tax loss selling in the US, new year cheer and the pattern of capital raising through the year.
- While we see shares doing well this year, right now they are vulnerable to a short-term pullback after strong gains since December. Renewed trade fears obviously don’t help.
Since late last year share markets have rebounded with US shares up 25% to their recent high, global shares up 22% and Australian shares up 17% as last year’s worries about tightening monetary policy led by the Fed, global growth and trade wars have faded to varying degrees. Following such a strong rebound some have said that maybe it’s now time to “sell in May and go away” given the old share market saying. Of course, this is a reference to seasonal pattern in shares.
It’s all seasonal:
Seasonal patterns have long been observed in equity markets. Yet, despite the potential, they provide for astute investors to profit from them – and in so doing arbitrage them away – they seem to persist. The “January effect” has perhaps been the most famous, where January typically provides the best gains for US stocks, but the anticipation of it in recent years has seen it morph into December such that it has become the strongest month of the year for US shares. However, it is part of a broader seasonal pattern, which is positive for shares from around October/November to around May and then weaker from May. This can be seen in the seasonal pattern of average monthly changes in US share prices (using the S&P 500 index) shown in the next chart.