Investors love patterns. Whether charting technical indicators or dissecting an earnings report, finding themes that repeat can offer investors a sense of predictability amid chaotic markets.
The most reliable patterns in finance tend to be based on the calendar year.
Seasonality, as it’s called, refers to predictable and recurring changes in markets that tend to happen at the same time every year. And though markets have steadied after last week’s abrupt sell-off, stock market bears looking at seasonal patterns will be encouraged by this history ahead of this year’s election.
Ryan Detrick, chief market strategist at Carson Group, recently joined Yahoo Finance’s Stocks in Translation podcast to break down some of these patterns for investors. Though Detrick has long been an advocate for understanding the forces of seasonality at work in the markets, he cautioned: “We would never blindly just invest in seasonality.”
Still, investors have nearly a century of solid data from the S&P 500 (^GSPC) to analyze market trends.
For example, consumer spending usually increases during the holiday season. Back-to-school shopping boosts retail sales in late August and early September. And summer vacations or holidays can slow down overall market activity and lower trading volumes.
All of this creates observable patterns in the market that influence prices of stocks, bonds, commodities, and even cryptocurrencies. This data allows returns from each day of the year to be analyzed to find the average loss or gain, and those results can be combined to create a seasonality map for the year.
The chart shows that stocks tend to go up each year, but average annual gains are interrupted by a big downturn from September into October. This data reflects the numerous market crashes that have occurred in September and October, including Black Monday in October 1987 and Black Tuesday in October 1929.
Toward the end of October, things tend to turn around, on average, and stocks often rise into year-end, capped off by the much-vaunted Santa Claus Rally.
But August is also no picnic for investors, either.
“Historically, when August is down, it tends to really be down more 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 downgrade of US debt by S&P in 2011.
As the S&P 500’s seasonality map shows, not much happens in August — on average.
But we can see the effects of a pickup in volatility by studying the seasonality of the VIX (^VIX), which offers a different set of seasonal clues for investors to decipher.
The chart below was created by averaging the monthly closing VIX levels from 1990 — the beginning of the index’s calculations — through 2023. It shows that volatility typically bottoms in July, then picks up in August, crescendos in October, and then trails off into year-end.
But seasonality isn’t just about monthly patterns.
The four-year US election and presidential cycle provides a unique lens through which to view market behavior.
Each of the four years has its own characteristics and tendencies, and the fourth year of the cycle averages a 7% gain in the S&P 500, Detrick noted.
But seasonality also has plenty of limitations, not the least of which is a somewhat limited data set, and Detrick reminds investors that what matters in the current environment is uncertainty — about the election, the Fed, the US economy, and more.
“It’s important to remember that scary headlines and pullbacks are normal in most years,” Detrick said.
And while seasonality can give us clues about how the market got here, and where it could be headed next, it’s not a crystal ball, just a tool.
“We’ve gotten through this before,” Detrick said. “Investors need to remember that we’re going to get through this again.”
On Yahoo Finance’s podcast Stocks in Translation, Yahoo Finance editor Jared Blikre cuts through the market mayhem, noisy numbers, and hyperbole to bring you essential conversations and insights from across the investing landscape, providing you with the critical context needed to make the right decisions for your portfolio. Find more episodes on our video hub. Watch on your preferred streaming service, or listen and subscribe on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.
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